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

Market Structure Introduction Economics can be described as a theme, which helps individuals or organizations’ or governmental ities to study the production, distribution as well as consumption of goods and services. It can be asserted as a complex social science, which has a wide range of applications from mathematics to psychology. Economics helps people to understand the politics and business aspects among others. At the same time, it also helps to understand the needs and demands and along with that it helps to choose the best allocation of the resources from various alternatives. Simultaneously, economics can be defined as a way of thinking. In the present day context, business units get largely impacted by the market structure of the place or a particular nation as business performance is directly dependent on how the economy behaves in the long run. Notably, on the basis of economic situations and other features, market structure of a place is divided into several forms including perfect competition, monopolistic competition and oligopoly and each one of them has their own characteristics or features. Business units have the need to analyze these particular features to ensure the accomplishment of their business targets (Baumol & Blinder, 2011; Hubbard, 2007). Objective of the Discussion In this proposed discussion, the main aim will be to describe various market structures including perfect competition, monopolistic competition, oligopoly, and monopoly along with identifying a few of the characteristics of each of the market structures. Additionally, the paper will discuss the way in which high entry barriers into the market can influence long-run profitability of a firm. The paper will also discuss price elasticity of demand of each of the market structures and its impact on pricing of products to get a more comprehensive understanding about the same. Market Structure and Characteristics According to economists’ point of view, due to nature, size and approaches differentiation market can be segmented in four broad categories. Those are emphasized below: Perfect Competition Perfect competition describes such market conditions, where a large number of sellers are involved in business activities and also the sellers are dealing with homogeneous products. Notably, in this sort of market structure, none of the players are big or large enough to capture the entire market by their operations. In such market scenarios, each of the players in the market is competent enough to ensure perfect competition for others in the same market which further augments the level of competition in the market. This sort of market structure provides utmost opportunities for business units to perform in an effective manner; otherwise they might perish while attaining long-term sustainability (Baumol & Blinder, 2011). The two important characteristics of such market structure include the presence of large number of small players and identicalness of the product offered by the company. Monopolistic Competition This sort of market structure is quite rare in the present day context. It is particular market structure where there involves imperfect competition amid the players as all the players existed in the market deal with different products further reducing the level of competition amid themselves. In such market structure, there are no perfect substitutes that one company can emerge with for the products of the other players which further reduce the threat of substitutes. In the monopolistic market structure, the players take into concern the pricing approach of the competitors while framing its own pricing strategy into to get a competitive edge over that of the competitors. The two important characteristics of such market structure include the differentiation of the products of the companies operating in the industry along with the aspect of free entry and exit from the industry (Baumol & Blinder, 2011). Oligopoly Oligopoly is a particular form of market structure that is mainly dominated by a small number of players owing to which the competition is quite less amid the players in this particular structure. Notably, since the number of players is quite small in such market structure, each one of them is aware of the strategies and moves of the other. It will be vital to mention that in such market structure, the decision of one firm is largely influenced by the decision of the other especially in the domain of strategic planning for the business. The two important characteristics of this particular market structure will include the interdependence of the firms amid each other along with the presence of price rigidity within the market structure (Baumol & Blinder, 2011). Monopoly This is one of the rarest forms of market structure in the present day scenario since the level of competition is quite high in every industrial sector. It is a particular market structure, where there is only a specific supplier of a particular product or service. In such structure of the market, the market is dominated by a single player owing to the lack of economic competition along with the minimal threat of substitution of the products. It will also be crucial to mention that in such structure, companies hold the rights and the power to set the price of the commodity or the services without getting minimally impacted from the pricing approaches of the others firms in the industry. Two of the most vital characteristics of this particular market structure include the absence any clear substitute of the products as well as the entry barriers for any new player in the market (Baumol & Blinder, 2011). Real Life Example of a Market Structure The above discussion mainly intended to depict the theoretical perspective of the different market structures that prevail within the present day market context. However, in order to attain a better and comprehensive understanding in the subject area, it will be crucial to depict a real life example of a particular industry structure. In this context, the example of the US food industry has been considered in this particular discussion. The food industry of US is one of the biggest of the world. It is believed to be one of the most complex forms of industry structure where it involves the collective forms of business supply of the food that is consumed by the people all over the world. In terms of complexity, the US food industry is quite similar to the respective global industry since it involves various suppliers, the farmers, the companies, the firm equipment makers and the retailers among others. There are a large number of players operating in this particular industry which includes both the small and the large players. It has been noted that by the 2006, the country had more than 28,000 companies/players operating with regard to food processing or manufacturing. However, the number of big players is quite less in comparison with the small units. Analysis depicts that out of the 28,000 food manufacturers in the country, only 500 are large players. Since the industry accounts for more than 10% contribution to the economy of the nation, the industry is considered to be quite significant. A few of the major players of the food industry of the country include Nestle, Cadbury, Unilever and SABMiller among others which further increases the competition amid the companies and the overall industry structure. However, the presence and importance of a large number of small players which include the food material suppliers and the farmers further make the industry an oligopolistic one. Since the big farms are largely dependent on the operational approach of the small farmers and suppliers; the market is seen to be largely ruled by the oligopolists (small firms) (Saitone & Sexton, 2012). The firms operating in the sector are quite dependent on one another for their operations, which is again relevant to one of the most important characteristics of the oligopolistic markets i.e. interdependency of the firms. Notably, since the demand for the food products is quite high in the market on a daily basis, each of the companies operating in the industry has its own significance in the industry (International Trade Administration, n.d.). Hence, this feature of the food industry also aligns with the oligopolistic characteristic of less competition within the industry. Therefore, it can be affirmed that the food industry of the U.S is indeed quite oligopolistic in nature. High Entry Barriers into A Market Will Influence Long-Run Profitability of the Firms Observably, barrier to entry is among the major weaknesses, which is associated with any sort of firm. It will be crucial to mention that the alleged threat of entry in any particular industry might inspire firms to behave in a way that they are in a competitive market structure. This approach of the business units further impacts the profitability of the firms one way or the other. It is quite an obvious aspect that when companies have the fear of competition in a particular industry structure, they contain the fear of losing long-term sustainability of business in case their operations lack effectiveness. This aspect further influences the business units to operate in an effective manner along with ensuring maximum innovativeness in the business in order to get a competitive advantage in the long run. This aspect not only ensures the long term sustainability of the business units, but it also works towards enhancing the profitability of the business through attaining improved business operations. Hence, it can be affirmed that high entry barrier of a market structure not only increases the level of competition amid the firms but it also impacts their profitability in a favorable manner altogether. For example, the US food sector has a large number of players operating in the same which further increases the level of barriers for new firms to enter into the industry (Heger & Kraft, 2008). This will further encourage the companies to operate in a manner that can ensure their long term presence in the industry in the process of which they are able to improve their profitability. Competitive Pressures That Are Present In Markets with High Barriers to Entry As depicted above, with high enter barriers the present companies in the industry have the pressure to ensure long-term sustainability with ascertaining effective and dedicated operations in various business domains. Notably, the high entry barrier in any market protects the present firms of the market from dealing with extreme level of competition. However, it is important for the present firms to operate in a manner they could obstruct the new entrants to enter into the market. In this regard, though the present firms are under less pressure to face competition from external companies, but they still has the internal competitive pressure to ensure better control as well as utilization of the business resource, maintaining proper scale of the business operations, ensuring the loyalty of the customers through delivering effective and innovative products and/or services. These are done to ensure the sustainability and competitive advantages over that of the present competitors of the industry which further shows the competitive pressure that is present in markets with high barriers to entry (Beneito & et. al. 2011). Price Elasticity of Demand in Each Market Structure Price elasticity of demand is a particular concept of economics which is used to depict the responsiveness of the changes in the demand for the products and services owing to the changes in price of the same for any particular market. The price elasticity of demand and its impact differ on the basis of change in the market structure. For instance, in the monopolistic structure of the markets, the power or the control of pricing entirely lies with the business units as there is minimal effect of the demand of the products due to price change owing to the lack of product substitutes and market competition. However, in the oligopolistic market structure, price elasticity of demand has a major impact on the pricing approaches of business units. Since there are a large number of firms operating with similar kind of product, companies that are able to deliver products at reasonable price will get maximum demands as compared to the companies delivering high priced products. Correspondingly, the elasticity of price on demand is quite high in perfectly competitive market. In such market structure, the demand for the product gets largely affected with the increase or decrease in price of the products or services. Hence, the pricing strategies of the firms are largely impacted by the same. In the monopolistic competitive markets, each of the firms makes different kind of products for which it can charge price much different from that of the rivals (Horsky & Nelson, 1992). Again, since in such market structure, the perfect substitutes of the products are quite rare, the price elasticity on demand is quite minimal (Besanko & Braeutigam, 2010). Role of the Government Affects Each Market Structure’s Ability to Price Its Products The role of government is different based on the ability of the pricing in diverse market structures. For each of the market structures, government of nations has its own way of intervening in the operations of the companies especially with regard to pricing. In this regard, it has been noted that the intervention of the government in the monopoly market is quite negligible in nature which further allows the companies to set their own price and set the profit margins for themselves. In the oligopolistic market, the government involves in constant supervision of the companies and restricts them towards delivering products at high price and ensures stability in the level of competition. Correspondingly, in the perfectly competitive market, the intervention of the government is quite less which further allows the companies to set the prices of their products or services based on the competitive nature of the industry (Besanko & Braeutigam, 2010). Effect of International Trade on Market Structure The aspect of international trade differs with the changes in market structure. In the oligopolistic market structure, firms are much benefited from involving in international trade as they are able to import products at quite a lower price which they can sell at a profitable price within their respective industries (Ruffin, 2002). Again, in a perfectly competitive market, government intervenes with the approaches of collecting taxes and tariffs which not only reduces the level of wellbeing of the companies but it also reduces the level of international trade owing to the high tariffs associated with it (Dixit & Stern, 1982). Correspondingly, the impact of monopolistic competition can also be seen in the international trade. In such market structure, trade is mainly conducted amid intra-industry which further limits the scope of trade up to a certain extent (Ruffin, 2002). Hence, the impact of international trade on market structure is quite apparent from the above illustration. Conclusion From the overall analysis of the paper, it can be comprehended that in the present day scenario, the impact of the structure of the market on the business is quite apparent. There are four forms of market structure amid which companies conduct their operations which further include perfect competition, oligopoly, monopoly and monopolistic competition. Each of the market structures has their own characteristics which differentiate it from the others. The piecing strategy as well as the nature of competiveness of the firms is also determined on the basis of the market structure. The level of intervention of the government also influences the pricing strategy of the business units which is segregated on the above structure based on the industry they operate in. Hence, the present structure of the market can be determined from the overall analysis. References Besanko, D., & Braeutigam, R. (2010). Microeconomics. United States: John Wiley & Sons. Beneito, P., Coscollá-Girona, P., Rochina-Barrachina, M. E., & Sanchis-Llopis, A. (2011). Competitive pressure determinants and innovation at the firm level. European Commission, 1-51. Baumol, W. J. & Blinder, A., (2011). Microeconomics: principles and policy. United States: Cengage Learning. Dixit, A., & Stern, N. (1982). Oligopoly and welfare: A unified presentation with applications to trade and development. European Economic Review, 19, 123-143. Hubbard, R. G. & O’Brien, A. P., (2007). Macroeconomics. India: Pearson Education India. Horsky, D., & Nelson, P. (1992). New brand positioning and pricing in an oligopolistic market. Marketing Science, 11(2), 133-153. Heger, D. & Kraft, K. (2008). Barriers to entry and profitability. Discussion Paper, 1-24. International Trade Administration. (n.d.). U.S. department of commerce industry report food manufacturing NAICS 311. Retrieved from http://trade.gov/td/ocg/report08_processedfoods.pdf Ruffin, R. J. (2002). Trade under oligopoly. Review of International Economics, 1-23. Saitone, T. L. & Sexton, R. J. (2012). Market structure and competition in the US food industries. American Enterprise Institute, 1-16. Read More