Different Types of Market Structures - Essay Example

? Market Structures Introduction In order to understand the different types of market structures a thorough analysis is required for understanding ofthe market forces. This report makes an attempt to answer the various types of questions that may arise in the context of markets in an economy Answer 1 In the economic analysis there are various kinds of market structures that may operate in the economy depending on the number of sellers and the degree of market power that each seller has in the market. Therefore the market structures of an economy can be categorized under the following types. Perfectly Competitive Market In a perfectly competitive market there are a large number of buyers and sellers and therefore the equilibrium price and quantity in the market would be determined by the combined forced of demand and supply. Since the market power is equitably distributed among the sellers in this market who sell homogenous products the markets generally have a downward sloping demand curve. On the other hand the individual firm will face a horizontal demand curve as the price would be set by the market and it will be given to the individual seller. While the market equilibrium of a perfect competition would be at the point of intersection of the demand the supply curve, the individual firm will produce at the point where Marginal Cost curve cuts the Average cost curve from below. In this figure the firm will earn only normal profits as the firm has to supply the products in the market at the price which is equal to the cost of production of the company. Source: Arnold, 2013 Characteristics There is no barrier to entry or exit in this type of market. Any firm may easily come into the competitive scenario and may leave the market without having a major effect on the demand and supply in the market. The firms sell homogenous products which mean that the buyers would be indifferent between the sellers who offer the products in the market. Monopolistic Competition Monopolistic Competition is a form of market structure in which there are a few sellers that sell at a price set by all the sellers and the product that the sellers offer to the market are the differentiated products. In this case the there would be excess capacity in the production process. Each of the firms has a single portion of the market share. The production will take place at the point where ATC curve is tangent to the market demand curve instead of the point where the MC curve cuts the ATC curve from below. Source: Arnold, 2013 Characteristics: The products sold in a monopolistic competition are a differentiated product which means they are not perfect substitutes of one another. The produces have some control over the market price and hence there is excess capacity in the process of production. The quantity produced would be less compared to that of perfectly competitive markets. Monopoly In a monopoly market there is a single seller and a large number of buyers. Since the entire market power is in the hands of the single seller the price is set above the price that is present in the perfectly competitive markets. The monopolist will produce at the point where MR is equal to MC. This is depicted in the diagram below. Source: Varian, 2010 Characteristics In case of a monopolist there is presence of excess capacity and the quantity produced is less than that of the competitive markets. There is high barrier to enter the monopolistic market is very high. Oligopoly An oligopolistic market is that which has a few sellers and a large number of buyers. The market power is distributed among the sellers of the markets. There may be different types of oligopolistic competition. While some firms may be fighting price competition the others would fight the quantity competition. Characteristics The firms in the oligopolistic markets are the price setters. The barriers to entry in this type of market are high. Answer 2 The market for fresh vegetables in the city is an example of perfectly competitive market. In this market there are a large number of buyers and seller. The price of the vegetable is determined by the demand and supply forces. The products in the market are more or less homogenous. This means that if a buyer wants to buy lettuce he can go to any seller for it. If he does not want to buy it from a particular seller he can go to a different seller to buy the same lettuce. On the other hand there is not much barrier to entry and exit. If a particular seller wants to enter the market he will have to sell at the market determined price. No seller already selling in the market can set his price higher in order to discourage this new entrant. On the other hand there is also no exit barrier. If a seller wants to leave the market it would hardly have any effect on the market supply or demand as such. Answer 3 Barriers to entry are the features of a particular market that prevents the other players from entering into the market. This is done by the existing player generally by setting a price that is lower than the market price. This is because the existing firm has been in the market since a very long time and therefore has some cost advantage compared to the other firms. For example, a monopolist would be operating in a market for a long time and would be able to achieve economies of scale. This means that the firm at the low cost would be able to supply the products. Since the monopolist has entered into the market before the other firms, therefore they would be able to achieve economies of scale in some time. Now if a new company tries to enter the market the initial cost of entry would be high. At the initial stages when the new firm starts producing the price at which he would be able to supply would be much higher than that of the price offered by the first entrant. This would drive the new player out of the market because no buyer would be purchasing the product from the new seller at such a high price. Therefore there would be high barrier to entry of the monopoly market due to the cost advantage of the monopolist. Answer 4 There are several other forms of barriers like the issue of patents to the company which has moved into the market for the first time. Thus the first entrant would only have the privilege to produce that particular product at the lowest price. The monopolist generally sets such entry barriers for the other firms which would be potential entrants. This is also done by having a control over the scarce resources of production as well as taking a control over the suppliers that provide the raw materials of production. Since the monopolist would buy the products at huge amounts from the suppliers and the number of suppliers of the raw materials is the greatest, there would be lack of bargaining power of the suppliers. This would lead to a greater control by the monopolist. In the manufacturing and the production companies, the technology of production which was first introduced by the company is patented. This may be a low cost technology of production. Therefore the new entrants would not be able to produce the products with the use of that technology. This in turn would increase the control of market power by the monopolist. Again the barriers to entry might also be present in form of government controls. For example in most of the countries in order to open a bank any entity would require the permission of the central bank of the country to do so. Thus the number of players in the market would be determined by the government. Answer 5 The price elasticity of demand is defined as the percentage change in the quantity demanded for a percentage change in the price of the commodity. A demand curve is said to be perfectly elastic when the price changes infinitely with the changes in the demand for the products. This means that for a perfectly competitive market the price elasticity of demand is infinity. This means that the firm operating in the perfect competition operates in a perfectly elastic demand curve. On the other hand the demand curve faced by the monopolist is a relatively inelastic demand curve. Since there is only one player in the market, a slight change in the price of the product would not be able to change the demand for the product to a large extent (Baumol and Blinder, 2009). This is because there is no other perfect substitute in the market which the buyers buy in case the price rises. Therefore the monopolist faces a downward sloping demand curve and the firm in the competitive market faces a horizontal elastic demand curve. An inelastic demand implies a higher profit margin for the producer. On the other hand an elastic demand curve implies a lower profit margin for the producer. The monopolist would price the product in such a way that there would be a huge profit margin. This has been shown with the help of the following figure. The price elasticity of demand for the oligopolist and the monopolist would lie in between that of the monopolist and the perfectly competitive market. Thus the pricing of the products would be such that there would be some profit margin for the producers but it would be lower than that of the monopolist but much higher than a perfectly competitive firm (Hirschey, 2000). Answer 6 The government of a country has a dominant role in controlling the markets. In case of a perfect competition the government generally does not interfere into the markets as the quantities and prices are determined by the market forces. However, the government often imposes restrictions in forms of quotas or quantity restrictions and tariffs which are price restrictions. The government can impose price floors or ceilings in order to control the prices of the product. As in the figure below, the government can set a maximum or a minimum price for the product. In the figure in the left hand side panel the imposition of the price of the company would result in excess demand in the market as there would be shortage in the supply of the products at that price. Similarly a price floor would result in the excess supply in the market as shown in the right hand side of the panel. The same kinds of imposition of a price ceiling can take place in case of a monopoly market. The monopolist generally changes a very high price which is very high for the customer to reach which leads to the creation of excess demand in the market (Pindyck and Rubinfeld, 2001). The imposition of the government regulation inform of a price ceiling would lead to a reduction in the producer surplus for the firm in case of a monopolistic player as shown in the diagram below. Source: Samuelson and ? Nordhaus, 2010 The price would be set by the government and hence the monopolist at that price would be forced to supply more of that product than in the case of the absence of the government. Similar kind of situation would be taking place in case of a market with oligopolistic competition or monopolistic competition where the sellers would not be able to charge more than what is set by the government. However in case of oligopoly there is an opportunity for cartelization for the few firms that are operating in the market and they try to keep the market price higher than what should have been the fair price. In such situations the government intervenes into the matter and tries to stop such illegal cartelization so that the common people get the products at an affordable and fair price. Answer 7 In a model of open economy, the market power of the different players in the market would differ. This means that monopolist may become a player of the perfect competition in the world markets. This phenomenon is known as dumping. In other words a monopolist would be offering the products at a comparatively high price in the domestic market because he would be the price setter. On the other hand he would be a firm in perfect competition in the international markets. Therefore he would be a price taker in the global markets. There would be intense competition and he has to offer his products at a price which the other firms of other countries are paying and hence he would offer at a lower price. On the other hand the firms that are playing in the perfectly competitive market with the introduction of the international trade would benefit. This is because the firms would be able to market their products in the international markets where there might be lack of other players. For example, Bangladesh is an exporter of Jute products. The jute products are sold in the domestic market in a perfect competition scenario. On the other hand the products may not be available to the consumers of the other countries. Therefore the producers of Jute would be able to charge a higher price if they cater to the international markets (Anderton, 2009). In case of Oligopoly or monopolistic competition however, the producers which have some market power in the domestic market would have to play as firms in the perfect competition. This would reduce their market power in the international scenario. Hence the oligopolist would prefer to play more in the domestic market rather than in the global markets. Conclusion Therefore the above analysis provides an insight into the various types of market structures that may exist in an economy and provides an analysis of the role of the government, international trade and the other dynamics in the market. References Arnold, R.A. (2013). Microeconomics. Mason: South Western Cengage Learning. Varian, H.R. (2010). Intermediate Microeconomics. W. W. Norton and Company. Samuelson, P.A. and ? Nordhaus, W.D., (2010). Economics. New Delhi: Tata McGraw-Hill Education. Anderton, A. (2009). Economics: A Level Student Book. London: Pearson Education. Hirschey, M. (2000). Managerial Economics. Hinsdale: Dryden Press. Baumol, W.J. and Blinder, A.S. (2009). Microeconomics: Principles and Policy. Mason: South Western Cengage Learning. Pindyck, R. and Rubinfeld, D. (2001). Microeconomics. London: Prentice-Hall. Read More