The Theory of Market Structures - Essay Example

? Market Structures Introduction The theory of market structures seeks to identify the characteristics of demand and supply in different markets or economies under various circumstances. Presumably, the various market structures devolve different characteristics to the price elasticity factors in the market and often affect the economic development and planning programs. Arguably, there are varied market structures in every market and their characteristics in presenting quantity and imposing prices upon the units affect consumption patterns and the buyer and seller relationships. For example, perfect market competition, oligopoly, monopoly, and monopolistic competition vary broadly in terms of the market outcomes under the practices of the coinciding factors of demand and supply (Martin, 2012). Discussion of the market structures Perfect market competition In perfect market competition, economists recite that there are many firms, price takers, and the number of suppliers tends to be equal to the number of suppliers in the market. The reason of its occurrence is the ideology that informative buyers and sellers deal with homogeneous products (Stackelberg, et al 2011). Monopoly market structure The structure leads to the domination of the market by one producer of a certain product whose utility serves the needs of a broad group of clientele thus; the business entity manipulates the supply and pricing utilities and buyers rest to no obligation other than making purchases at different prices per unit of consumption (Oner, 2013). Monopolistic competition The situation occurs when there are many firms in market competing to market their products but often differ as they produce different types of products. The freedom of entry and exit rests upon the buyers and sellers and they obviously lack information thus they live in an imperfectly competitive market (Heywood, 2006). Duopoly market structure The advent of duopoly in a market occurs in the presence of two firms that are interdependent and obviously collude in their bid to execute their programs. There is a possibility of restrained policies to market entrants. The firms also restrain each other seeking to excel profitable through price leadership. Oligopoly market structure This market structure presents varied characteristics since the present firms often compete against each other despite the fact that they show a higher degree of interdependence. There exists the characteristic of non-price competition and an often possibility of collusion among the firms. There are barriers imposed to the new market entrants (Oner, 2013). The Californian market structure The markets pose different ownership structures with some depicting horizontal while others depict vertical structures. Research ascertains that power production utilities in Californian markets are authorized by the government to produce essentially on cost-based approaches rather than regulatory approaches (Stackelberg, et al 2011). However, the distribution of power through transmission rests regulated by the authorities thus ensuring equated supply to meet the existing demand rather than leaving the mandate to the producers who may aim to deliver to consumers who tend to pose higher marginal consumptions over domestic consumers. Arguably, the Californian market structure in the electricity sector seems to be a monopoly as well as a duopoly in that after production of the power by differentiated utilities restrains the entry of new firms. Further, the situation leads to the stipulation of prices in accordance to the will of the producers however, the system of duopoly shifts to oligopoly as the power producing utilities seek to gain abundant benefits while the authorities restrain them from accessing the consumers. Further, monopolistic competition prevails in the energy sector of California since the firms differ in production of energy from coal, hydropower utilities, and nuclear power production mechanisms (Bushnell, Mansur, and Saravia, 2004). Effects of high entry barriers to the long-run profitability of the markets High entry barriers in markets determine the number of participants in the market whether in domestic on the other hand, in foreign markets. In many occasions, these barriers result from the ability of the existing players to manipulate the entry and exit variables. For instance, foreign firms may perceive the threat of high market entry barriers after realizing that the entry criteria is promising, but then they may lack the ability to abandon a certain production line for another or shift production utilities towards exiting the markets (Heywood, 2006). Under such circumstances, the barriers may serve to restrain the existing firms to market their products at the prices that the customers seem to r accept while despising the long-term plans and objectives of the company. Eventually, the firms present in the market shall fall into a process of rival competition since they tend to practice all sorts of strategies that seem promising to the acquisition of the desired success. The threat of new entrants threatens firms in a market after contemplating of the probability that they shall threaten the continued existence and market operations. Other high entry barriers in markets that tend to threaten the long-term profitability emanate from the bargaining power of customers. For instance, under circumstances whereby the demand is low and the supply is high, the firms tend to engage in a situation of continued competition for the available customers who in turn become aggressive and dictate the prices at which they are willing and able to buy (Oner, 2013). Arguably, the high-end barriers transform the market operations into increased costs and decreased profit margins as the firms struggle to maintain their production and marketing utilities. Competitive pressures in markets with high-end barriers The bargaining power of customers is one of the high-end barriers that tend to stir competition in markets. Arguably, when the buyers derive the understanding that they have the capability of manipulating the foregoing prices then the firms engage on competitive rivalry that may eventually lead to collusion as each of them struggles to deliver the required products at the acknowledged prices. Similarly, the threats of new entrants and substitute goods influence competition in markets. Arguably, consumers tend to decipher importance to new entrants with the notion that the new producers may bear the ability to offer more benefits over their predecessors (Wilkinson, 2005). Secondly, the consumer groups may ascertain that the new firms offering substitute commodities at favorable profits might have the ability to deliver the essential benefits. These circumstances stimulate the ability for firms to engage in competitive rivalry rather than the enhancing their production utilities to deliver enhanced [value and benefits to the consumer groups. At the same edge, each firm struggles to establish competitive strategies at the short-term that tend to restrain the competitors’ performances and yield more customer support thus implicating to increased demand in the products. Since the situation of competition is continued, the firms engage into unworthy practices thus forcing some of the weak competitors to exit the market while others shift their production to developing new products to meet new consumer needs. The presence of suppliers with untamed bargaining power stirs the presence of increased competition thus resulting into a situation of continued rivalry and ill market practices (Stackelberg, et al 2011). The price elasticity of demand in each market structure In monopoly market competition, the supplier dictates the price and quantity supply mechanisms with knowledge that the demand of the products remains intact and unshaken since its products aim at meeting certain demand. Arguably, price elasticity of demand and supply in monopoly markets is inelastic since a shift in supply or an increment in prices does not affect the demand curve. In perfect market competition, price elasticity is inversely proportional to demand and supply since marginal production equals marginal consumption (Etro, 2009). In duopoly markets, price elasticity prevails since a reduction in price or supply by one firm leads to an increase in demand for the firm with reduced prices or a decrease in marginal output thus; price elasticity equals marginal production and marginal consumption. Monopolistic competition establishes that a large number of buyers and sellers of differentiated products in the same markets. Arguably, these markets tend to stimulate high differences since the demand and supply of one firm’s products does not affect that of the other products thus the market structure establishes price inelasticity of demand and supply since reduced in demand may lead to reduced or maintained prices and the vice versa. In oligopoly, economists ascertain that the presence of competitors serves to restrain the shift in demand and supply variables and the imposition of price inelasticity to the quantity of products (Wilkinson, 2005). Therefore, oligopoly presents inelastic demand and supply for products and often establishes inversely unequal shifts in the curves. At this point, buyers seek to purchase products from their choice of firms since they tend to lack information about the market. Role of government in market structure’s ability to pricing Governments often dictate the market practices and the ability of the present firms to dictate their products’ prices. Since governments form the political environment of each society, the policies imposed serve to stimulate or deter business practices. In this case, firms in different market structures find price manipulation becoming a strenuous procedure after realizing the governments’ practices and the ability to hinder acquisition of the desired profits. Contextually, nationalization, expropriation, confiscation, and privatization policies deter the desired freedom of pricing (Menasce, 2004). The essence is that the policies dictate the ability of firms to enter and exit the markets thus dictating competition, and the demand and supply variables (Heywood, 2006). Further, the economic practices of different governments of initiating the application of monetary and fiscal policies dictate the extent at which the market environment shall show the ability of firms to produce and demand for different products. For instance, the market structure may have the ability to maintain stringent prices to cater the foregoing demand if the governing bodies subsidize the production processes and impose price fixing to avoid the threat of inflation that may result from price escalation (Menasce, 2004). Firms fail to dictate prices in market structure after the governing bodies restrain them from the practice through the withdrawal of tariffs or the imposition of percentage marginal increase per unit cost of production. Essentially, capitalist governments affect market structures’ pricing since they enhance the ability of entry and exit of new firms from the markets (Stackelberg, et al 2011). Similarly, the firms present in the free market economies have the ability to dictate pricing practices in accordance to their will to meet the organization’s plans and objectives. The effects of international trade in different market structures International trade affects regional, geographic, and multinational producers in different market economies. Therefore, international trade affects all market structures variedly ranging from monopoly, duopoly, monopolistic, oligopoly, and perfect markets. For instance, firms shall decipher influences from international trade while existing in a perfect market structure despite the absence of competition and the ability of equated demand and supply of products. In this case, global inflation affects all economies, the currencies used thus suppliers, and buyers will increase prices and purchase the products irrespective of the changes. In the case of monopoly, international trade may devolve joint approaches for integration of trade practices such that there will be free entry and exit of firms in the market thus the monopoly power shall dwindle under the entry of new firms in the market (Martin, 2012). The same case applies in monopolistic competition since in the presence of international policies the firms in the market will increase thus leading to the domination of differentiation. Arguably, the market shall shift from monopolistic competition to oligopoly (Wilkinson, 2005). Lastly, international trade practices of imposing trade tariffs and other economic practices may lead to the exit of firms or increase of new firms in other markets thus influencing the ability of free competition and interdependence in oligopoly markets, and restraining the entry and exit variables of the market thus implicating to stagnated or dwindling situation rather than economic growth. Conclusions The study of market structures is ideal for economies to identify their abilities to perform operations aimed at ensuring both short run and long run growth of the economy. Intense evaluation deciphers information to economists that all market structures may change to benefit the economy rather than the firms or buyers present in the markets. For instance, it is certain that government policies and entry barriers may serve to impose negative and positive motivation towards producers thus their practices eventually shape the market utilities towards acquisition of the set variables. Therefore, market structures play an integral role in establishing economic growth. References Bushnell, J., Mansur, E. T., and Saravia, C. (2004). Market Structure and Competition: A Cross-Market Analysis of U.S. Electricity Deregulation. Center for Study of Energy Markets. Retrieved on October 24, 2013 from: http://www.ucei.berkeley.edu/PDF/csemwp126.pdf Etro, F. (2009). Endogenous market structures and the macroeconomy. Dordrecht: Springer. Heywood, J. S. (2006). Product market structure and labor market discrimination. Albany: State Univ. of New York Press. Martin, S. (2012). Market structure and market performance. Review of Industrial Organization, 40(2), 87-108. doi: http://dx.doi.org/10.1007/s11151-012-9338-8 Menasce, V. (2004, Sep 07). Price elasticity. The Ottawa Citizen. Retrieved from http://search.proquest.com/docview/240765657?accountid=458 Oner, E. (2013). Simultaneous effects of supply and demand elasticity with market types on tax incidence (graphical analysis of perfect competition, monopoly and oligopoly markets). International Journal of Economics and Finance, 5(2), 46-55. Retrieved from http://search.proquest.com/docview/1431279341?accountid=458 Stackelberg, H. ., Bazin, D., Urch, L., & Hill, R. (2011). Market structure and equilibrium. Berlin: Springer. Wilkinson, N. (2005). Managerial economics: A problem-solving approach. Cambridge: Cambridge University Press. Read More