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Market structure - Research Paper Example

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1. Market structures The perfect competition market structure is a situation in which traders sell homogenous products, have no artificial entrants and exists to the market and producers are so many that they have no effect on market outcomes. No such industry exists in reality but the ideas and concepts are useful in analyzing how markets are supposed to work…
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Market structure
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Market structure

Download file to see previous pages... This implies that product differentiation exists and each one is capable of satisfying divergent consumer needs. Barriers to entry are few thus explaining why the competitors are many in number (Makiw, 2008). The oligopolistic market structure is one in which a small number of players operate, and they can control the market. Usually, these players are large enough and account for a substantial market share. They make decisions interdependently and are highly motivated by the need to cooperate. Therefore, players exert a degree of control over market conditions. Furthermore, this model is characterized by many barriers to entry. A monopoly is a market in which only a single producer exists. The person is therefore capable of exercising considerable control over the market. Products sold do not have close substitutes thus prompting consumers to stick to them. Normally, the monopoly thrives in water distribution, electricity and gas industries. Barriers to entry are also quite high. 2. Real life example of a market structure in my local city A Shell retail outlet is an example of an oligopolistic market in my city. The organization has relatively few competitors in the gas pump market. Retail outlets may be high in number but the number of companies controlling those outlets is relatively few. Furthermore, Shell is a large company that accounts for about 20% of the market share. This degree of concentration in the oil retail industry makes Shell gullible to collusions with its rivals. For a number of times, the company has been accused of setting artificial prices that do not relate to world oil prices. Regardless, the organization’s products are often sold for a price that is relatively close to market rates. In oligopolistic markets, this is typical for many organizations as competition based on price could lead to inefficiencies. Barriers to trade are also substantial as certain restrictions exist. Shell has control over oil as a natural resource. It is also a vertically integrated firm in which other aspects of oil production take place. The facilities and equipment needed to carry out this work are quite expensive. Therefore, new entrants would not have the economies of scale needed to make significant profits in the market. They would have to raise their prices in order to cover production costs, yet this would drive away consumers who would seek inespensice alternatives. Shell also enjoys large revenue streams from its elaborate business model. Therefore, it is likely that a competitor interested in entering the market would have difficulties advertising or matching Shell’s marketing expenditure (Frank and Bernanke, 2009). 3. How high entry barriers into markets influence long run profitability Entry barriers may come in the form of patents, government licensing, benefits that accrue from economies of scale or resource control. Industries with high entry barriers will not have many alternative suppliers. Therefore, market forces will be weakened. Profitability will mostly depend on the supply side of the equation. Usually, when a seller sets their prices, they normally do this on the basis of their costs. Marginal costs refer to those additional expenditures incurred when a seller makes an additional item. In markets with low entry barriers, sellers will price their commodities on the basis of ...Download file to see next pagesRead More
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