Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly - Assignment Example

MARKET STRUCTURES and Section # of Market Structures There are several market structures existent in a society- perfect competition, monopolistic competition, oligopoly and monopoly- each with its merits and demerits. As a consultant, I will analyze these structures present in the city from several different dimensions which will allow us to understand the impact of each structure on the people, society and the economy as a whole. Question 1: Describe each market structure discussed in the course (perfect competition, monopolistic competition, oligopoly, and monopoly) and discuss two of the market characteristics of each market structure. Perfect Competition It is a hypothetical market structure which has competition present at the highest level. (Krugman, 2012) The firms are selling an identical product. The firms are price takers, and are unable to influence the market conditions. Monopolistic Competition It is a more realistic market structure which has competition to a greater extent, but the firms in the market are selling different products while competing for the same consumers. (Krugman, 2012) The firms are selling different products The firms are price takers, and follow a downward sloping demand curve. Oligopoly It is a more realistic market structure in which a few firms dominate the market, and are able to influence the conditions to a greater extent. Although, there may be many small firms operation in the same market, but they will just follow the lead of the few firms. (Krugman, 2012) The firms’ decisions are dependent of the actions of the other rivals. The barriers to entry are high Monopoly It is a hypothetical market structure in which one firm dominates all or nearly all of the market for a particular kind of a product. (Krugman, 2012) The firm is selling a unique product The firm is the price setter, and influences the market conditions to a greater extent. Question 2: Identify one real-life example of a market structure in your local city and relate your example to each of the characteristics of the market. A street full of food vendors is an example of perfect competition. These vendors are selling a similar product and are price accordingly. KFC is an example of monopolistic competition. The firm is competing against the same-sized restaurants like Wendy’s, McDonalds, Pizza Hut and others. These firms try to differentiate their products and then price them accordingly. Wireless service providers are a good example of a n oligopoly structure in the area. Four of the firms namely AT&T Mobility, Verizon Wireless, T-Mobile and Sprint Nexte dominate the market and control around 89 percent of the total telephone service market in the United States. US Postal Service is still one of the monopolies operating in every city of the United States. The firm has a potential high barrier to entry- a license from the US government, has the potential to influence the market conditions as well as it does still have unique product attached to itself. Question 3: Describe how high entry barriers into a market will influence long-run profitability of the firms. There are empirical studies present that specifically tell us the relationship between the barriers to entry and long term profitability of the firms. Research evidence suggests that the firms will set the price close to the cost if the barriers to entry are non-existent or low in a particular market. In this case, the firms do make a bigger profit in the short run; however, they believe that the entrance of the new firms and competition, the profits will erode. (Krugman, 2012) In a monopoly, the barriers to entry are really high which protects the market from strong competitive pressures. These barriers could be licensing, patents and economies of scale. Therefore, the firm earns a high profit in the long run. However, there will be time when the long run profits will not be positive. When the average total cost curve is above the demand curve, the monopolistic firm will incur a loss and will not be able to continue in the business. (Krugman, 2012) The strong chances of the long term profits do attract new entrants in the market. However, the strong barriers to entry keep these firms at bay for a long time; and let the lone firm reap all the profits for a particular time. Question 4: Explain the competitive pressures that are present in markets with high barriers to entry. Competition pressures are even present in market with high barriers to entry. Such high profits and prices encourage the industrialist to improve on its product quality continuously as well as develop viable substitutes to maintain its power in the market. This is known as the dynamic competition. Therefore, there is a need for continuous innovation in this technological advanced age even in markets structure with high barriers to entry. (Lipsey, 2008) Question 5: Explain the price elasticity of demand in each market structure and its effect on pricing of its products in each market. Perfect Competition The price of elasticity, in a perfect competition market structure, is perfectly elastic. This means that the firm can sell all of its output at the market price. The firm is only a small part of the structure and is unable to charge a higher price on its products. (Oner, 2013) (Krugman, 2012) Monopolistic Competition In a monopolistic competitive market structure, there is no specific relationship between the quantity supplied and the price. In this scenario, the firm has a slight control over the market conditions and allows the firm on the demand curve. Assuming that the buyers are sensitive to prices, the firm will charge a lower price, whereas if the buyers are insensitive to the price, the firms will charger a slightly higher price. Therefore, we can say that the firm takes advantage of this elasticity and fixes the quantity supplied and the price. (Oner, 2013) (Krugman, 2012) Oligopoly In this market structure, there exists a price rigidity; which signifies that the firms do not compete on price rather on innovation, advertising and barriers to entry. In this case, when a firm increases the price, the competitive firms do not match its price which results in the firm loss of major quantity demanded; whereas, when a firm decreases the price, other firms match this decrease and the firm is unable to earn an upward shift in the quantity demanded. (Oner, 2013) (Krugman, 2012) Monopoly In a monopoly, the relationship between the marginal revenue curve and the price elasticity of demand is particularly important. In this case, the firm only produces that quantity of product that falls in the elastic region of the demand curve, as it leads to an increase in the profitability. (Oner, 2013) (Krugman, 2012) Question 6: Describe how the role of the government affects each market structure’s ability to price its products. Perfect Competition In a perfect competition, the government has least interest to intervene in the market. Nonetheless, the government does tax the market to fund itself. However, this intervention is to an extent that will promote economic growth, protect the taxed class as well as ensure an effective working machinery to govern the affairs. This taxation has the ability to affect the price of products. Generally, any increase in tax is bound to increase the price of the commodity. (Krugman, 2012) Monopolistic Competition In a monopolistic competition, the companies tend to be innovative. It is their capacity to produce distinguished products that provides them with an opportunity to charge the customer the price they want. It is imperative to note that the government does not intervene in a market, where there is monopolistic competition. However, it is only a coercive government that can intervene in such a market. A coercive government is said to intervene because of its coercive products in order to determine the price of the products. Apart from that, monopolistic competition is said to be a monopoly that is done with the help of the government. (Krugman, 2012) Oligopoly The government intervenes in this type of market because it has to control the prices of the products that are produced and marketed by oligopolies. Price control is seen as a technique to control these oligopolies by the government. The government intervenes in the process of price determination only because it has to contain inflation. The government control of the oligopolies helps in maintaining the price level. The products that oligopolies produce or market are of high importance to the government. (Krugman, 2012) Monopoly In a monopoly, the government intervenes to make sure the predatory power of the firm does not affect the competitors that cannot compete on a bigger scale. There are Anti-Trust laws enacted by the government that give the authorities the power to abolish the practice of predatory pricing from the market. Most of the companies, in order to establish their monopoly in the market, use the technique of predatory pricing, which gives them the opportunity to oust small competitors from the market. The government intervenes because it has to make sure that the small competitors do not exit the market because of the hostility of the firms that establish monopoly. (Krugman, 2012) Question 7: Discuss the effect of international trade on each market structure Perfect competition In a perfect competition, the market forces determine the price of the products, which is why it is not as affected by the international trade as other markets. In a perfect competition, the sellers in the market already try to compete each other. Because of the competition, the prices are relatively low, which is why the new international entrants in the market will not have much to exploit. Apart from that, the efficiency of the firms will continue to rise because they are provided with a chance to cater international markets. (Garcia, 2012) Monopolistic Competition In a monopolistic competition, the firms tend to be affected by the entry of the products from international competitors. The prices of the products are bound to fall because of the supply of goods from international markets. The local companies have to cut their cost of product to compete against the international firms. The market gets affected because of the introduction of new products in the market. The competition created because of the international trade may reduce the profits the companies to zero. If the firms in the market have the capacity to export, they will reap the benefits from international trade. If they cannot export the products, they have to produce and sell the products in the local market efficiently. It is not easy to enter foreign markets because thousands of other firms already cater those markets. (Garcia, 2012) Oligopoly Oligopolies tend to be benefited from international trade. The oil industry falls under this market structure. It will be of no doubt to say that the oil industry reaps benefits as the demand for oil increases internationally. If the demand decreases, a negative impact on oligopolies is witnessed. But it is important to note that the oligopolies get more benefits from international trade than firms in other market structures do. (Garcia, 2012) Monopoly If the firm that establishes a monopoly in a country has the export capability, it will be benefited from international trade. The firms that do not have the products to compete in the foreign market tend to suffer losses due to an increase in international trade. The international companies find it easier to exploit the market of the monopolistic firm, which eventually leads to a reduction in the profit of this local firm. Because of the introduction of products from efficient competitors, the cost associated with the production of units for the firm increases. The introduction of new products affects its profits but also affects its capability to compete in the market. (Garcia, 2012) References Krugman, P. Wells, R. Microeconomics. Worth Publishers (2012) Lipsey, Richard G, Economics tenth edition. New Delhi, India. Oxford University press (2008). Garcia Pires, A. J. (2012). International Trade and Competitiveness. Economic Theory, 50(3), 727-763. Matsumura, T., & Tomaru, Y. (2012). Market Structure and Privatization Policy under International Competition. Japanese Economic Review, 63(2), 244-258. 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. Shughart II, W. F. (1996). Monopoly and the Problem of the Economists. Managerial & Decision Economics, 17(2), 217. Zhu, T., Singh, V., & Manuszak, M. (2009). Market Structure and Competition in the Retail Discount Industry. Journal Of Marketing Research (JMR), 46(4), 453-466. Read More