Competition, Monopoly, and Oligopoly & Monopolistic Competitive Market Structure - Term Paper Example

Lecturer: The research study provided a brief introduction about the market structure and revealed the way different firms compete in the global competitive market. It revealed the way monopoly firms restrict new entrants into the market and charge high prices because they are single sellers. The research revealed the way oligopoly firms maximize abnormal profits in the market. It revealed the way cartel firms under oligopoly to maximize profit both in the short run and in the long run. The research explained briefly on perfect competitive market structure and revealed some features of this market structure. It described the way firms maximize profits with the help of diagrams, the researcher revealed the way they maximize profit at the equilibrium point in both short and long run. Lastly, the conclusion summed up the discussion, and the researcher provided some significant areas for further research study. Competition, Monopoly, and Oligopoly & Monopolistic Competitive Market Structure Introduction The market is structured depending on varied factors and variation that determine the market structure of a particular firm in an economy. Competition is one of the factors or condition that determines the structure of a firm. The economists assume that there are many buyers and sellers in the marketplace; hence, they compete favorably for the available products in the market. Therefore, competition in the market contributes to changes of prices for commodities; thus creating a shift in demand and supply curve. Furthermore, there are substitute products in the marketplace; thus, when one product increases the prices, consumers chose the alternative of consuming substitute products. The buyers and sellers have the ability of influencing prices for commodities, and this contributes to increased competition in the market. Different firms have dissimilar market conditions and these firms produce homogenous products, but with varied features that enable them to compete favorably in the competitive global market. Competition Economic competition in the market place results due to influences from buyers and sellers. Few buyers may compete in order to attract favorable offers from potential buyers. On the other hand, buyers may compete in order to obtain effective product offers from the sellers. The buyers and sellers may exchange property rights and everyone in the market interacts voluntarily in order to achieve self-interest. The buyers and sellers interact; thus, they signal much information about the product through product prices. Successful sellers reduce prices in order to influence buyers and out-compete their competitor (Mankiw 2011, 36). The sellers can maximize profits in case the price exceeds the products costs. Monopoly A monopoly refers to a market structure whereby only a single producer or buyer for a commodity exists. The monopoly firms are the price makers because they are single sellers in the market. Monopoly is a single business firm and it is characterized by varied features including market restrictions because of high costs and production of homogenous products. The government has powers to control or restrict entries into the market by creating barriers. The barrier to market entry may result because the firm may have exclusive rights of accessing the natural resources. For instance, the Kenya Power and Lighting Company is a monopolistic firm because the government takes control over the resources. The same case applies to Saudi Arabia oil industry because the Saudi government is the sole control of the natural oil reserves. The market also have a patent right that impede other competitors from entering into the market. The monopoly firm is classified into numerous features including perfect monopoly whereby the single seller does not have substitute products. Therefore, there is no perfect competition, but such firms are extremely rare. Another one is imperfect monopoly whereby the single seller does not have close substitute products meaning that the products have remote substitute; thus, there is fear for market competition. Discriminating monopoly is a monopoly whereby firms charge buyers different prices on the same product. The sellers may charge customers even more than the normal prices for the products depending on their social status, sex, race or gender qualities. Legal monopoly is a monopolistic market structure, and in this case, the patent rights or trademarks apply. For instance, the music industry is one of examples where legal monopoly applies. Oligopoly The oligopolistic firm has only few firms that make up the industry and the selected firms have control over the market price for commodities. The products are nearly homogenous, but interdependent firms compete for market shares due to market demand and supply forces. Firms in oligopoly lack perfect competition and this may lead to increased prices for products. Each oligopoly firm should be aware of their action because there are few industries. The decision made by one firm may influence others in the market. Oligopoly market structure has varied features including the ability for the firm to set prices; thus, the oligopoly markets are price setters instead of price takers (Lieberman and Robert 2010, 134). Entry barriers into the market are high, and the significant barriers include high economies of scale, expensive access to technology and incumbent firms discourages new entrants into the market. Moreover, the entry barriers can enable the government to put strict polices some of which may favor existing firms only than the new firms. The firm enjoys profits in the long run due to maximization of abnormal profits. The oligopoly may join cartel firms in order to improve their marketing power and the marketing group work jointly in order to increase the output level. Mankiw (2011, 96) argues that the cartel members in the oligopoly behave like monopolist, but each firm distributes differentiated products. Therefore, the demand curve in the oligopolistic market structure is horizontal. The profit maximization in the cartel firm is similar to the monopolist firms as indicated in figure 1 below, but the oligopoly firms maximize abnormal profits. In this graph, the marginal revenue is equal to the marginal cost because the cartel members combine their output level and determine their price depending on the marketing demand. Therefore, their prices can be equal as indicated in the label abcd in the diagram below. Figure 1: Profit Maximization in the Cartel Firm Monopolistic Competitive Monopolistic competitive is also known as competitive market, and this is where numerous firms each with a small market share portion and differentiated products compete in the market. Monopolistic competitive is characterized by four main features. One of them include large numbers of industries each with little market control on price for commodities and varied potential competitors. Secondly, similar products whereby each firm sells identical products and they are close to substitutes but not perfect substitutes. The products have physical differences, but buyers may perceive them as different. Thirdly, relative resource mobility is another feature whereby the firm has freedom of entry into the industry and exit out of the firm. The firm has few restrictions, but they are not perfect. The government does not restrict them by any regulations, entry barriers or startup costs. Lastly, it also has exclusive knowledge for commodities and perfect technology. Buyers in this market structure have potential knowledge about the products offered in the market (Stackelberg, Damien, Lynn and Rowland 2011, 133). They have complete information about differentiated commodities and product brand names. Firms in monopolistic competitive market behave similar to monopoly but many producers distribute differentiated products. In this market, firms use the prices set by their rivals and ignores their prices, thus an imperfect competition. They can use the market power in profit generation in the short run. Therefore, the firm can maximize profits and produces commodities where the marginal revenue is equal to the marginal cost as indicated in figure 1 (a) below. The firm can collect product prices depending on the average revenue. Thus, the difference between the average cost and average revenue of the firm may produce the total profit when multiplied with the quantity. However, other firms entering into the market may contribute to the decreased competition and the market may end up being perfectly competitive one. This is where the firms cannot gain economic profits, but they can maximize profits in the long run. In this case, the firm can produce commodities where the marginal cost are equal to marginal revenue in the long run equilibrium as indicated in figure 2 (b) below. However, the average revenues of the firm can shift because of new entrants and increased competition in the market. Therefore, the firm can no longer sell their products above the average cost, but rather below; thus they cannot claim for any economic profits. Figure 2 (a): Short Run Equilibrium In Monopolistic Competitive Figure 2 (b): Long Run Equilibrium In Monopolistic Competitive Conclusions Different firms have dissimilar market conditions and these firms produce homogenous products, but with varied features that enable them to compete favorably in the competitive global market. Therefore, economic competition in the market place results due to influences from buyers and sellers. The monopoly firms are the price makers because they are single sellers in the market; they restrict other firms from entering into the market. However, the oligopolistic firm has only few firms that make up the industry, but the selected firms have control over the market price for commodities. Lastly, firms in monopolistic competitive market behave similar to monopoly but many producers distribute differentiated products, but there are large numbers of firms with little control. Suggested areas for Further Study Marketing structure Principles of marketing Marketing management Marketing strategies Works Cited Lieberman, Marc, and Robert E. Hall. Principles & Applications of Macroeconomics. Mason, OH: South-Western Cengage Learning, 2010. Print. Mankiw, N G. Principles of Economics. Mason, Ohio: South-Western, 2011. Print. Stackelberg, Heinrich , Damien Bazin, Lynn Urch, and Rowland Hill. Market Structure and Equilibrium. Berlin: Springer, 2011. Print Read More