Maximizing profits in market structures - Essay Example

Monopoly – The monopoly is the only producer of a particular good or service; therefore, it has a downward-sloping demand curve. If the firm sells its product at a high price, it will be able to sell only a small quantity because few people would be able to afford it, and there are not substitutes. If the firm would wish to sell more units of the product, it will have to lower its prices (Mankiw, 2009). The type of product may be homogeneous or differentiated and the monopoly firm has full control over its price (Jain & Khanna, 2009).

Oligopoly – An oligopoly is a market with only a few suppliers. Because they are so few, actions taken by one seller creates an impact on the other sellers, such that they become interdependent upon each other. They therefore tend to behave pursuant to certain strategies depending on the actions of the other firms (Mankiw, 2009), and there are situations that alternatively present opportunities for conflict and for cooperation. The product may be homogeneous or differentiated (Jain & Khanna, 2009). . For monopolies, P > MR = MC (price exceeds marginal costs).

The firm first determines the output quantity at which it will produce, at the point where marginal revenue and marginal costs are equal. The demand curve is thereafter used to determine the highest price the firm may charge in order to sell the quantity determined. This is so because the demand curve tells the quantity buyers are willing to buy at a certain price. Oligopoly – For oligopolies, the profits a firm makes depends to a great deal of what its competitors make, because there are so few of them supplying the market.

Based on this observation, game theory has been developed, the method by which a firm in an oligopoly tries to predict how its competitors will react if it makes a strategic move. For instance, in an oligopoly it is generally observed that firm will lower their price in response to a price reduction by one of the other firms, particularly if the product they produce is homogeneous. However, if one of the firms raises its prices, the other firms do not automatically follow. The reason for this is that the firms whose prices are viewed as too high in comparison with its competitors would lose its buyers to those firms with lower prices, because their products are deemed to be easily substitutable with each other.

The result is a kinked demand curve. Barriers to entry Competition - In a competitive market, the barriers to new entrants are low and few, if any, thus the market is open to many sellers and the products are undifferentiated as to be easily substituted. Everybody sells at the same price, and there is always demand at that price. Monopoly - For natural monopolies, barriers to new entrants are high because the