Any market structure constitutes three market attributes, which include the number of sellers, the nature of exiting products and services, and the ease of entry or exit into the market. In today’s economy, there are different types of markets. In some markets, producers are highly competitive while in others, producers are engaged in the coordination of action to avoid direct competition with each other (Kurtz, 2014). From a general perspective, market structures are classified as perfect competition, monopoly, monopolistic competition, and oligopoly (Stackelberg et al, 2010). The main objective of this research paper is to describe each market structure in terms of entry barriers and long-term profitability. In addition, the paper will also describe the best market structures for selling and buying products, and the response to each of the market structures to price changes. The role of the government and international trade on the market structures will also be a subject of focus in this research paper.
Types of market structures
Perfect competition in a market characterized by a homogenous product, a large number of small firms, and the existing laws and regulations make it easy to enter and exit the market. In a perfect competition, the attribute of a large number of small firms is fulfilled when none of the firms has a significant share of the total output (Baumol & Blinder, 2012). This means that no firm has the ability to affect product prices. In the United States, there are thousands of pork farmers operating independently. If one farmer raises the price of pork, the going market price of pork is unaffected (Kurtz, 2014).
In perfect competition, the firms produce a homogenous product. This is an indication that the goods or services produced in this market structure are identical. This assumption is essential in the market because it rules out the possible rivalry among businesses in quality and advertising differences (Stackelberg et al, 2010).
In perfect competition market structure it is easy to enter into the market considering that there are no barriers facing new firms. In perfect competition, it is a requirement that the resources are mobile making it easier to enter and exit the market (Amacher & Pate, 2013). The possible barriers for regulations can be government imposed and they include patents, permits, and licenses (Baumol & Blinder, 2012).
Perfect competition is therefore characterized by the selling of homogenous goods or services by a large number of highly informed sellers. The market has a single market price, which is determined by some level of interaction between buyers and sellers. Each firm in this market structure has an infinitely elastic and horizontal demand (Kurtz, 2014).
There exists only one seller or buyer for a product in this market structure. This means that the single business entity is the industry. Entry into such a market structure is highly restricted because of different impediments such as high cost. These impediments may be political, social, or economic (Baumol & Blinder, 2012). For example, it is possible for a government to create monopoly tin an industry that it intends to control such as the energy industry. Entry is relatively difficult in this market structure because most of the times a single business entity has exclusive rights to the targeted natural resources (Amacher & Pate, 2013). For instance in the United Arab Emirates, the governments is the sole controller of the oil industry. It is also possible for monopoly to exist in a market when the controlling company has a patent or copyright which prevents other companies from entering the market. For example, Prifzer has a patent on Viagra (Kurtz, 2014).
In monopolies, barriers of entry are considered as the most effective strategies that make the single business entity profitable considering that other firms are prevented from accessing the market. Entry barriers take numerous forms (Amacher & Pate, 2013). For example, monopolistic strategies can be introduced to control scarce resources as in the case of De Beers Company and the diamond industry (Stackelberg et al, 2010). This makes such companies have the ability to act through unconstrained methodologies. Despite the perceived advantages, monopolies have the ability to impose inefficiencies in the society. However, if they arise when the entity discovers an improved and efficient technique in the manufacture of products ore engaged in the creation of new products aimed at fulfilling unmet consumer needs, then the consumers are destined to benefit from monopoly (Stackelberg et al, 2010).
This is a market structure characterized by only a few firms. These companies sell products or services that may not be completely standardized but they are similar enough that they are in competition (Amacher & Pate, 2013). Examples of oligopolies include fast food burgers such as Kentucky Fried Chicken, McDonalds, and Burger King. Other oligopolies in the United States market are wireless network providers such as Sprint, Verizon, and T-Mobile (Kurtz, 2014). One of the defining features of an oligopolistic market structure is that the success of firms in the market is often determined by the initiatives of major rivals (Kurtz, 2014). In an oligopoly there is often need to monitor the activities of the companies considering that their actions have the ability to affect the market (Baumol & Blinder, 2012). In an oligopoly, it is vital for companies to keep track of their competitors. For instance, the shareholders of Kentucky Fried Chicken would not be impressed if the management had no idea that Burger King had introduced a new kind of product or that McDonald was offering promotional discounts on soft drinks (Stackelberg et al, 2010).
In an oligopolistic market structure, there are barriers of entry. For example, it is possible for a new wireless company to set up a wireless carrier. However, it would be relatively costly to construct the infrastructure. It would also be possible to break into the national fast food market chain but relatively complex to overcome brand allegiances (Kurtz, 2014).
Monopolistic market structuure is characterized by many companies engaed in the sale of goods or services that are similar but have some slight differences. Inasmuch as the name monopolist competition may seem a contradiction, it connotes the idea that companies in such a market possess some level of monopoly though in a limited sense. Monopolistic competition is different from perfect competition and monopoly (Kurtz, 2014). This is because in the former, consumers are indifferent between the available products of competing companies. In the latter, the existing products do not have any close substitutes. In between perfect competition and monopoly, there exists a market in which products have substitutes, which are not perfect but share some relationships (Amacher & Pate, 2013). In such situations consumers are often willing to extra, but if the price differentials in relatively large, they will go for a substitute or alternative product instead. In mid-20th century, Sun Records had a monopoly in the sale of Elvis Records. During this period, there consumers had no choice but to buy the record from Sun. In monopolistic competition, devoted consumers may be willing to pay extra money for an Elvis record than music by other artists (Stackelberg et al, 2010). In this situation, Sun has the authority of setting its product price to a certain level. However, if Sun raises the price of Elvis records to a high level, most customers would prefer save their financial resources or instead buy records by other musicians (Stackelberg et al, 2010).
Since the firms that constitute a monopolistic competition own a small percentage of the total market, they have the ability to provide differentiated products and this makes this market structure different from pure competition and monopoly models (Amacher & Pate, 2013). Other factors that characterize monopolistic competition include advertisements, product differentiation style, firm location pricing strategies, and packaging techniques. Furthermore, this model of markets structures is also characterized by easy exit and entry for businesses (Kurtz, 2014).
Companies that operate in a monopolistic competition market structure have are characterized by demand curves that are highly but not perfectly elastic. The demand curve is more elastic than the monopoly demand curve considering that the firms have other competitors involved in the production of close substitutes. The demand curve is however, less elastic compared to pure monopoly considering that the products by the sole company are differentiated for those of its competitors (Stackelberg et al, 2010).
The MR=MC rule has the ability of giving companies their profit maximization output. This means that for companies, the prices they charge will be on the demand curve. When profit maximization is considered in the end, it is possible to assert that the situation will tend to break even in the companies (Stackelberg et al, 2010). Companies can enter the market easily but the demand curve facing by an individual company will shift down as the buyer’s shift their demand to the products by the new firm until the company breaks even. It is important to note that any shift demand below the breakeven point, some companies will move out of the industry. This means that most firm operation in monopolistic competitive structure is bound to experience break-even in the long run from a theoretical perspective (Stackelberg et al, 2010). In the real sense, some companies realize profits since they are able to differentiate themselves from their competitors and build a base of loyal customers. There are also companies in the monopolistic competitive structure that experience losses in the long run but they continue operation within the market with the objective of realizing profits. The firm owners often prefer a flexible lifestyle and are often willing to earn normal profits that are lower than their opportunity cost (Kurtz, 2014).
In situations where the marginal surpasses the cost by the price, then it is possible to assert that the society values additional units that are not being produced. It is also possible for the average cost to be higher in monopolistic competition considering that they have to incur advertising cost as a way of attracting more customers (Stackelberg et al, 2010).
Best market structure for buying and selling products
Perfect competition presents the best market structure for buying and selling products. This is because perfect competition is rare in the contemporary world but it is an important model because it helps in the analysis of competition within an industry especially in the stick market and in the agricultural industry (Kurtz, 2014). In selling a product, an individual company operating in a perfect competition model often views its demand as a perfectly elastic. A horizontal line at the rice level characterizes the resulting demand curve that demonstrates perfect elasticity. The demand curve only appears in this form for individual firms since they have the responsbility of accepting the prevailing price no matter the amount of products or services they produce. The marginal revenue that connotes an increase in total revenue, results from a unit increase in output (Kurtz, 2014). The perfect competition market structure is considered the best in buying products because the price is always constant. In the short term, the interactions between supply and demand play an essential role in the determination of the clearing price (Stackelberg et al, 2010).
A common attribute that defines markets considered competitive include lower prices because of the presence of many competing firms within the market selling almost similar products or services. In situations where there is high cross-priced elasticity of demand of a single service or product, then the customers will be ready to switch their demand to the most competitively priced service or product in the market (Kurtz, 2014).
In perfect competition, there are low or no entry barriers. This means that it presents perfect conditions for a company willing to engage in the sale of its products in a new market. For a new firm, its entry is considered to be providing some level of competition to ensure that the prices are constant (Kurtz, 2014). Perfect competition model presents companies with the best alternative for selling their prices without incurring high loses. This is with regard to their opportunity cost because the prevailing laws in the market demand constant prices for all commodities irrespective of the cost of production. Relatively low and constant prices maintained in this market ensures that firm within the market realize relatively lower profits and profit margins compared to monopolies or oligopolies where the market is dominated by a few selected companies (Amacher & Pate, 2013). Effective selling and buying of products in any reputable market structure requires the high level of entrepreneurial activities considering that competition is a necessary process in nay market. for any market to realize and sustain high levels of competition companies must demonstrated genuine desires on behalf of their businesses to invents and innovate ways of driving the market forward (Kurtz, 2014).
In perfect competition model, the threat of competition with regard to product differentiation often leads to improvements in the rate of technological innovation and adoption. This is because companies within this industry are required to be responsive to the dynamic need of the consumers (Kurtz, 2014). Perfect competition is considered essential for buyers and sellers since it provides some level of discipline for companies in the market to ensure that their costs of production and eventual prices are maintained at a constant. This approach if effective since it minimizes wastage of scarce resources while at the same time refraining from the exploitation of consumers through high product prices and profit margins (Stackelberg et al, 2010). Through this approach, it is possible for these companies to stimulate competition and improvements in this market making it more dynamic with regard to the quality of products. In the end perfect competing market structure since it has the ability exhibiting high levels of economic efficiency (Amacher & Pate, 2013). For the optimal economic efficiency to be realized it would be important for all the conditions and the defining attributes of perfect competition to be upheld. In perfect competition, improved technologies such as the internet have made it easier to engage in price comparison in a quick and efficient. Furthermore, the internet has also contributed to the relaxation of entry barriers (Stackelberg et al, 2010).
Perfect competition is however different from monopolistic competition because in the latter profit maximization occurs in situations where marginal revenue is equal to the marginal cost. This is compared as a relatively inefficient because the resulting quality is less compared to that which is produced in a perfect competition market structure (McEachern, 2013). This means that for producers it is possible to supply products below their capacity of manufacturing. Like monopolistic competition, monopoly enhances the creation loses and inefficiencies when price determination is based on quantity produced (Kurtz, 2014).
Market structures are important in any economy since they define the nature of business and the strategies that producers must employ in an attempt to attract consumers. Market structures are classified as perfect competition, monopoly, monopolistic competition, and oligopoly. Perfect competition presents the best market structure for buying and selling products. This is because it helps in the analysis of competition within an industry especially in the stick market and in the agricultural industry. A common attribute that defines markets include lower prices because of the presence of many competing firms within the market selling almost similar products or services. In monopolistic competition profit maximization occurs in situations where marginal revenue is equal to the marginal cost. This is compared as a relatively inefficient because the resulting quality is less compared to that which is produced in a perfect competition market structure.
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