Consultation on Market Structures - Essay Example

Consultation on Market Structures Consultation on Market Structures Market structures are the different conditions or characteristics of a certain market that interrelate to determine the degree of competition and profitability of a given market in an economy. There are different market structures in the economy determined by the different characteristics including monopoly, perfect competition, oligopoly, and monopolistic competition. Perfect competition is a market structure where there are many buyers and sellers operating in the market having no influence on the price, hence are price takers (Samuelson & Stephen, 2012). One of the main characteristics of perfect competition includes sale of homogenous goods where all firms in the market same the same good. The second characteristic of perfect competitive market is perfect information where all sellers and buyers if goods know the price of the good and an increase in price by the seller will result in zero sales. Monopoly is a market structure consisting of one seller and many buyers; hence, the seller has total maker power on price and quantity. The main characteristic of this market is the lack of close substitutes; hence, the users have to purchase from the firm at the price. The second characteristic of monopoly is high barriers of entry that could be as a result of high capital requirement, ownership of production resources by the firm, natural causes, and government offer of single license to the firm ensuring presence of abnormal profits in the long-run in a monopoly market. Oligopoly defines a market structure characterized by few large firms operating in the market hence the decision of a firm affects other firms in the market. A characteristic of an oligopoly is aggressive and defensive advertising to ensure buyers get information on the products and give a firm advantage over the other firms in the market. The other characteristic is price rigidity, since when one firm increase price other firms may not follow suit leading to loss of sales by the firm with an increased prices and augmented sales for the other firms. Monopolistic competition consists of a market structure consisting of firms with a degree of market power owing to the production of non-perfectly substitutable goods, and the aim of the firms is profit maximization. A characteristic of monopolistic competition is free entry of firms ensuring the economic profits in the long-run are reduced to normal profits. The second characteristic is that firms produce differentiated products allowing for a certain degree of market power since the goods cannot be substituted perfectly like in perfect competition (Samuelson & Stephen, 2012). The airline market in the United States is an example of an oligopoly market structure with the American Airlines being an example of a firm operating in an oligopoly market in Fort Worth City. American Airlines uses a lot of expenditure of advertising and defense of its operations to ensure success in the airline market. The other characteristics of oligopoly evident in the actions of American Airlines is inability is price rigidity since there are other airlines and an increase in its prices will make customers use other airlines including Air France. Further, American Airlines is the high information availability of users on prices of American Airlines, which is another characteristic of oligopoly market. High barriers to entry have an influence on the longtime profitability of firms. High entry barriers in the market, as evidenced in a monopoly and oligopoly, ensure that there are few firms in the market. With few firms in the market, a firm has a degree of market power depending on the number if rims in the market resulting in the ability of the firm to determine prices. Firm’s aims at maximizing profit will choose the price that maximizes profit and limit the quantity supplied. Since, there are high entry barriers the high abnormal profits will persist in the market in the long-run, showing that high entry barriers in the market ensure the firms are profitable in the long-run making abnormal profits. Faced with a situation with low barriers to entry, firms will make normal profits owing to the reduction in the market power of firms from increased suppliers and presence of alternatives for the consumers. Competitive pressures in high barrier to entry market Competitive pressures are reduced when a firm in the market with high entry barriers if a firm is well established and has measures in place to deal with new firms trying to enter the market. However, there are some competitive pressures that firms operating in markets with high entry barriers have to deal with to remain the best firm in the market. Competitive pressures present in the market with high barriers of entry include for a new firm they have to be better and more efficient in the production of the good. Other competitive pressures include offering the good at lower prices compared to a well-established firm to get a percentage of the market share, and have access to low-priced raw materials to compete with the established firm. The other competitive pressure for new firms in high entry barrier market is providing products that are of better quality or same quality with that offered by the established firms in the market. Established firms are faced with competitive pressures of establishing measures to ensure strong response to new firms in terms of using economies of scale, ensure competitive pricing to face off competition from new firms, and access to materials that will ensure long-term presence as an established firm. In conclusion, competitive pressures are not many in high barrier to entry market compared to competitive markets. Price elasticity of demand in different markets and its impact on profitability of the firms Price elasticity measures the responsiveness of the goods sales to changes in the price of the good (Samuelson & Stephen, 2012). Under perfect competition, the price elasticity of demand is perfectly elastic where a small increase in a goods price there will be a drastic fall in sales to zero sales. The impact of this is that for firms to make profits they have to offer products at market prices because a reduction is price below the market price results in losses. Monopoly faces an inelastic price elasticity of demand where lack of close substitutes make consumers have no option to change consumption when prices offered by a monopoly increases. Monopolies, therefore, charge high prices and produce low quantity augmenting their profits owing to the inelastic price elasticity of demand of a monopolist’s products. Oligopoly market has a kinked demand where the price elasticity of demand for a good above the kink is elastic while the price elasticity of demand for a good below the kink is inelastic. This results in rigidity of prices where an increase in price by a firm results in reduced sales during a decrease in price of good results in losses. The effect of price elasticity on an oligopoly is that a firm has to set prices similar to the market price to make profits. Monopolistic competition faces highly elastic demand owing to the presence of close substitutes that are differentiated by high advertising and innovation on the part of the sellers. Owing to high price elasticity of demand, increase in prices results in a high fall of sales. Firms highly differentiate their products, advertise highly, and reduce cost of production and sell at the market prices making normal profits in the long-run. From the analysis of the impact of price elasticity on each of the different market structures, it is evident that price elasticity varies between the firms and affect the ability of firms competing in different market shares to make profits both in the short-run and the long-run. Price elasticity of demand has a monumental effect on profitability of the firm depending on the market structure the firm operates with inelastic demand on price change resulting in abnormal profits in a monopoly and elastic prices in perfect competition resulting in normal prices. Government Intervention and its impact on market structures ability to price products The government has a crucial role in ensuring different market structures are considerate to the needs of the consumers in terms of their access to products and the price they have to pay to access these products. This intervention affects the ability of firms in the different market structures to determine the price for their products. Government intervention in the market aims at ensuring allocation of resources results in social welfare and economic empowerment of the people. Government intervention, therefore, influences resource allocation to competing uses for efficiency and effectiveness of the economy. Monopoly is affected by government intervention in the market when market liberalization is done where fresh competition is introduced into the market. The government enters the market and supplies the service or produces the good breaking up the monopoly, hence the main impact of government intervention on the monopoly. The monopoly has to reduce its price and increase supply showing that government intervention reduces the ability of a monopoly to set high prices and produce low quantity. Government intervention may result in the monopoly when it provides only one license to a firm dealing in the provision of utilities like electric transport, energy, and gas. This results in lack of competition for the firm allowing for setting high prices, without government ensuring the firm is efficient in production and sets low prices for consumers, it gives the firm the ability to set high prices due to lack of competition. Perfect competition is affected by government intervention when the government sets a minimum wage for payment by each firm competing in the market. The impact of minimum wage legislation by the government is an increase in production costs for all firms reducing the profitability of the firms and requiring the increase in prices. The ability to offer low prices is affected by government intervention of minimum wage legislation; as the firms have to comply requiring increased prices of goods to break even. Oligopoly market structure is affected by government intervention through where a price ceiling is set by the government and businesses have to comply be setting prices consistent with this law. Setting a price ceiling reduces the ability of firms in an oligopoly market to set high prices showing the manner in which government intervention affects firms in an oligopoly market. Monopolistic competition is affected by government intervention when the government introduces price ceiling and minimum wage regulation affecting the ability to set certain prices and reducing the amount of profits that can be made by the firm in the market it operates. In effect, government intervention in the market affect all the market structures as a measure of solving market failure and improving the ability of the market to result in the distribution of resources and result in social welfare. Effect of international trade on each market structure International trade is the opening up of borders o territorial boundaries by a country to allow the exchange of goods, services, and capital, across international boundaries (Samuelson & Stephen, 2012). International trade forms a major part of the Gross Domestic product of countries owing to the large amount of transactions undertaken by business in international trade. Due to this importance, international trade has an effect on business structures. International trade affects monopoly markets where products are imported into the country at a lower cost resulting in lower prices than that offered by a monopolist. This results in an increase in supply in the market reducing the market power of the monopolist and subsequent eradication of abnormal profits. International trade also affects monopolies through generation of close substitutes for the products that was unavailable under domestic market. Available of close substitutes to a monopoly’s products gives the consumers a degree of market power and makes the monopoly firms consider reducing prices to maintain their market share. This allows for better pricing and a reduction in abnormal profits for monopolists since consumers have substitutes for the consumers. International trade affects perfect competitive market, since there is low production costs at international locations results in the need for increased efficiency and firms that cannot produce at lower costs have to exit the market. Profitability of firms in an oligopoly and monopolistic competition is reduced due to international trade. The reason for this is an increase in supply of produce reducing the demand for products and services from the firms owing to cheaper imports for the consumers. This affects these firms, as they will have to augment their production efficiency, increasing advertising, and expand market reach to compete effectively in the international market. International trade affects monopoly, oligopoly, perfect competition, and monopolistic competition market structures equally when it allows firms operating in these differing market structures to set up production centers in international locations where there is access to low cost labor and raw materials. These firms will reduce their production costs giving the competitive advantage and allows them to lower their prices but results in high unemployment rates in the country of origin. Overall, international trade affects all market structures through ensuring firms are efficient and competitive with firms that do not meet these criteria having to exit the market for better performance and lower priced products for the consumers. International trade mainly benefits consumers owing to access to high quantity of products and services to choose for in the market, low prices of goods and services, reduction in market power of the sellers, and increased substitutes for the products. Reference Samuelson, W. & Stephen, M. (2012). Managerial Economics. Hoboken, NJ: John Wiley and Sons. Read More