Market Structures - Research Paper Example

Download file to see previous pages... Following are the five market structures with the explanation of the scenario in which they are described in the book. Pure Competition A market structure is known as ‘pure competition’ when there are a large number of sellers or firms in the market. Due to the presence of a large number of sellers in the market, there is no possibility of the presence of monopoly, oligopoly or difference in prices. The competition brings the prices of products to a point that is determined natural by the market forces i.e. the demand and the supply. The example of pure competition in the book is given when the author describes the hamburger stands and restaurants that are located at the Route 66. The number of business operating in that one market is very large and the products provided by those businesses are almost the same. The example in the story suggests that there are a large number of small businesses that offer quick meals, candy, medications, gasoline and other essential commodities. In the presence of a large number of sellers and substitute products, the buyers are given with a complete freedom to choose any feasible seller. In such a scenario, the sellers cannot keep prices any higher than those prevailing in the market. The impact of such a market structure on the sellers is not so beneficial as they are not allowed to keep a high profit margin and the profit they make is normal profit that is determined by the market forces. However, buyers on the other hand, are benefitted by such a market structure as they do not have to pay any higher than the normal price. In some circumstances, when there is excess supply in a perfect competition, the prices may lower even further due to the laissez faire market forces. Monopolistic Competition Monopolistic competition is a market structure that is the opposite of the perfect competition. Unlike perfect competition, in monopolistic competition, the products are differentiated and there are less or no substitute products in the market and the number of firms is also low. This scenario benefits the sellers as they are free to charge any price for any buyer. From the story line, the example of monopolistic competition can be extracted from Chapter 26 when one of the characters goes to market in order to buy some groceries. It is found out that all the prices, even those of the basic necessities, are inflated and there is nothing the buyer can do against it. This scenario rises because there is product differentiation and price differentiation in the market. The character, Ma, is surprised at each price she is told for the products she wishes to purchase. She even reminds the shopkeeper that not long ago the prices were significantly less than what he quotes and the shops in the town offer lower prices. Other sellers are present in the market that has been indicated as ‘town’ in the book, but the monopolistic competition in intact due to the geographic location and price differentiation. Therefore there are no substitute products in the market. The sellers are free to charge any price at any profit margin and the buyers would have no influence over the prices and they would be compelled to buy at the inflated prices. Thus, in a monopolistic competition, the number of sellers in the market does not impact the overall competition due to lack of substitute products. The sellers are benefitted from this situation because they are free to ...Download file to see next pagesRead More