The Four Different Types of Market Structures - Essay Example

Analysis and discussion of the four different types of market structures Although there are a litany of different businesses that operate within the current environment, each of these invariably operate within one of the four basic types of market structures. Accordingly, these market structures can be defined as follows: monopoly, oligopoly, monopolistic competition, and pure competition. The overall importance of understanding and define each of these market structures rests in the fact that complete understanding and analysis of how firms within such structures operate is required as a function of making the business or firm more competitive; regardless of what market structure it exists within (Averitt, 1995). Accordingly, the following brief analysis will be concentric upon defining and discussing tell tale hallmarks of the manner through which each of these market structures operates. Firstly, perfect competition will be discussed. Naturally perfect competition only happens in a situation in which numerous difference firms are competing against one another for business. Furthermore, firms in perfect competition in a competitive industry will produce an optimal output at the minimum possible cost for the consumer. Even though this might seem as rather confusing wording, it stands to reason. When one considers the way in which the market and the consumer benefit from a situation in which firms are locked in continual competition, the analogy makes perfect sense. For instance, consider the restaurant market within most locations throughout the United States. Even though this is permeated by many branded entities that engage in competition within a variety of different markets, it is invariably made up of many local entrants to the market that are effectively locked in perfect competition with one another; representing a benefit to the consumer in the fact that their output is optimal and their costs are minimized. The ease of entry into such a market is better than any of the other models/structures that will be discussed. Comparatively, a quite dissimilar form of market structure is that the monopoly. The monopoly is obviously a situation in which a firm has no competition within the industry (Elzinga & Mills, 2011). Accordingly, such a structure necessarily reduces the overall level of output that a particular business entity might otherwise be capable of and drive up prices accordingly. As was referenced in the previous model, the overall level of societal good that can be represented within the monopoly is greatly decreased. Furthermore, this particular reality has an economic definition which is defined as deadweight loss. Due to the differential with respect to where the supply and demand curves me, this deadweight loss is a quantifiable economic term that can be presented in numeric form to the individual seeking to understand and define the monopoly. The ease of entry into such a market is all but nonexistent. Another type of market structure that is known to exist is defined as an oligopoly. The oligopoly is an industry with only a few competitive firms. A traditional definition of oligopoly includes a tacit understanding of the fact that an element of collusion is possible. Within such an element of collusive oligopoly, the firms that are “competing” agree to function as a singular entity as a means to drive up costs and represent a market structure that is similar to a monopoly. However, the situation represents the ultimate prisoners dilemma. The temptation not to cooperate and to undercut the competition by providing a lower price and/or a higher quality product/service to the consumer is enough to ensure that most oligopoly is still compete; albeit at least upon the surface. The ase of entry into such structure can be difficult if not impossible; due to the desire of the existing firms to keep any potential further competition at bay. The final market structure which will be discussed can be defined as monopolistic competition. The monopolistic competition model is perhaps the most confusing of all of the previous three which a bus far been referenced. Within it, and industry contains many different firms which compete for profitability. However, the firms that compete within this industry are similar yet they produce a slightly differentiated product from one another. In such a manner, overall production costs are higher than would otherwise be able to be achieved if the firm merely sold identical product to its competitors. In much the same way, the consumers benefit from the variety that these producers have to offer. It can further be noted that the ease of competition within this market and/or the ease of entry is one quite attainable. 2. What type of market structure does AutoEdge fit into? How does this market structure impact AutoEdge level of competition, elasticity of demand, price, and position in the industry? Maximum Points: 10  Analysis of the existing facts and a structure that AutoEdge adheres to, it can definitively be stated that the market structure within this particular industry is defined by monopolistic competition. As such, a litany of different firms has the potential to offer the same products that AutoEdge is able to provide; albeit in a slightly differentiated and nuanced manner. This particular market structure necessarily constrains the elasticity of demand, price, and ultimate position within the industry. Due to the fact that so many different participants are able to meet the same needs that the consumer may have, AutoEdge finds itself in a difficult position with respect to seeking to leverage further profitability and a competitive advantage over the other entrants in the market. This is partly due to the fact that price cannot be manipulated to a large degree due to the fact that already competitive pricing exists. Furthermore, differentiating the product any further would run the risk of alienating the existing consumer and/or losing a great deal of money with the research and development aspect of the entity (Julien, 2010). 3. What Recommendations would you have for AutoEdge? Maximum Points: 10  From an analysis of the situation at AutoEdge, it is clear that the firm faces a very distinct challenge with respect to growing its consumer base and seeking to differentiate its products in an increasingly competitive market. One of the recommendations that can immediately be made is seeking to cut costs with respect to the product of the completed goods. As past industry knowledge has proven, production with Detroit of auto components is all but a lost cause (Phillips, 2007). The high labor costs, issues with unions, and the death of American industry all point to the need to move production elsewhere as a function of staying competitive. Although outsourcing is not something that I would wish to recommend as a first approach, it is necessary to consider in order for AutoEdge to continue to be relevant to consumers within the near future. With respect to a timeline in order to achieve this, this should take place at the earliest time possible. Further changes with regards to supply chain management and research and development can only be integrated at such a time as this preliminary change has been made; so as to free up enough funding to ensure that the transition is at the very least possible. References Averitt, R. T. (1995). DYNAMICS OF THE FIRM (Book). Journal Of Economic Issues (Association For Evolutionary Economics),29(1), 318-320. Elzinga, K., & Mills, D. (2011). The Lerner Index of Monopoly Power: Origins and Uses. American Economic Review, 101(3), 558-564. doi:10.1257/aer.101.3.558 JULIEN, L. A. (2010). FROM IMPERFECT TO PERFECT COMPETITION. Manchester School (14636786), 78(6), 660-677. doi:10.1111/j.1467-9957.2009.02167.x Phillips, D. (2007). Labor talks underscore outsourcing trends. Automotive News, 81(6267), 24T. Read More