The Concept of Market Structure - Coursework Example

Market Structure Market Structure Market structure can be described with reference to different characteristics of a market, including its size and value, the number of providers and their market share, monopoly of certain organisations, consumer and business purchasing behaviour, and growth forecasts. The description may also include a demographic and regional breakdown of providers and customers and an analysis of pricing structures, likely technological impacts, and domestic and overseas sales. Market structure analysis involves describing how brands in a market compete against each other. It has had a long tradition in marketing. Some of the brands have monopoly in market share and hence the competitors find it difficult to compete with such brands. Market monopoly is not a healthy condition for a consumer as they will not get enough variety of goods from other suppliers. “The concept of market structure is central to both economics and marketing. Both disciplines are concerned with strategic decision making. In decision-making analysis, market structure has an important role through its impact on the decision-making environment. The extent and characteristics of competition in the market affect choice behavior among the actors”( Charles C. Fischer) In economics, we can say a monopoly exists, when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Monopolies are thus characterized by a lack of Market Structure 2 economic competition for the good or service that they provide and a lack of viable substitute goods. The verb "monopolize" refers to the process by which a firm gains persistently greater market share than what is expected under perfect competition. Characteristics and behavior of firms in perfect competition “Every in­dividual producer is always engaged in an attempt to maximize his “psychic income,” to arrive at the highest place on his value scale. In judging how much of his labor to sell and at what price, the pro­ducer will take into consideration the monetary income to be gained, the psychic return from the type of work and the “work­ing conditions,” and the leisure forgone, balancing them in ac­cordance with the operation of his various marginal utilities. Cer­tainly, if he can earn a higher income by working less, he will do so, since he also gains leisure thereby. And the question arises: Why is this immoral?” (MONOPOLY AND COMPETITION) In a free market economy people will tend to produce those goods most demanded by the consumers. There is no pressure on the producer. The choice is purely an independent one by the producer; his dependence on the consumer is purely voluntary. Profit making may be the only motive behind all the producers. In order to sustain in the market and to reduce competitions most of the producers will try to monopolize the market. We do not know, and economics cannot tell us, the optimum size of a firm in any given industry. The optimum size depends on the concrete technological conditions of each situation, as well as on the state of consumer demand in relation to the given supply of various factors in this and in other industries. All these complex questions enter into the decisions of producers, and ultimately of consumers, concerning how large the firms in various lines of production will be. Only the entrepreneurs themselves can Market Structure 3 determine what size of firm will operate most efficiently, and it is presumptuous and unwarranted for economists or for any other outside observers to attempt to dictate otherwise. Consider the case of mobile phones. Nokia was supposed to be the market leader in most of the countries. When they faced immense competitions from other suppliers like Samsung, L.G Sony Ericson, Motorola etc, they forced to incorporate more and more facilities to their existing designs. This forced the other suppliers also to follow the same path. Ultimately the consumers benefitted from getting a wide range of mobile phones at an affordable price. The apple’s touch phone is countered by Nokia recently with their variety of touch phones. So the firms in competition will study all the developments in the market and based on the feedback from the market they will add new and new varieties to their existing products to compete with other firms. Big firms often try to acquire more shares of the small competing firms and their by force them to merge with the big firm. This will strengthen their market share and will reduce their market competitions. Why is the perfectly competitive model seen as useful for economists today? First, monopolies cause reduction of the quality of the products. In fact, the company that has a monopoly will buy the cheap primary materials to reduce the total cost of the products. For example, when a company produces air conditioners in some country and it has a monopoly for this product, this company will buy cheap primary materials to reduce the total cost of the producing and that will reflect on the quality of the product. In addition, the company that has monopoly usually does not have good services for their products Market Structure 4 Monopoly causes a reduction satisfaction of the customers. Because there is only one provider or producer, the customers have no choices and they are coerced to buy this product when they need it. For example, in Saudi Arabia, there are only one local travel airlines to travel from city to another city inside Saudi Arabia. So the people are coerced to travel with these airlines and its disadvantages. In addition, the company that has monopoly usually does not have good services. Monopoly can causes increased prices as well . Because there is only one company can provide or produce the product, the company can increase its prices to make the highest profit The market competition is always a benefit to the consumers and the economy of a country. The consumers will get better products at affordable prices and the competitors will forced to reduce their margin of profit to sustain in the market. Immense competition will result in market diversification and which will contribute to the economy as well. In order to compete with the competitors the organizations will tend to expand their business operations in diversified fields which will create lot of employment opportunities and will contribute immensely to the infrastructure development. In this world, there are two, and only two, ways to settle what the prices of goods will be. One is the way of the free market, where prices are set voluntarily by each of the participating in­dividuals. In this situation, exchanges are made on terms bene­fiting all the exchangers. The other way is by violent interven­tion in the market, the way of dominant as against contract. Such dominant establishment of prices means the outlawing of free exchanges and the institution of exploitation of man by man. Market Structure 5 In their role as consumers, men would always like lower prices for their purchases; in their capacity as producers, men always like higher prices for their wares. Of course, consumers would prefer lower prices; they always would. In fact, the lower the price, the more they would like it. Does this mean that the ideal price is zero, or close to zero, for all goods, because this would represent the greatest degree of producers’ sacrifice to consumers’ wishes? The answer is no. When we talk about affordable price it doesn’t mean that the price should approach to zero. The price should be reasonable when compared to other products of the same caliber in the market. When, if ever, may the existence of monopoly be justified? It is a common belief that monopolies are beyond doubt extremely harmful to the economy. Passionate advocates of free competition argue that monopolies charge exorbitant prices while reducing output and consequently should be avoided like the plague. However, an in-depth study of the problem is likely to cast doubts on whether monopolies should be eradicated from the world once and for all. To start with, there are often cases of a natural monopoly, in which the efficient existence of more than one producer is impossible. It would certainly be ridiculous to lay a number of separate networks of pipes or cables belonging to different suppliers of public utilities. Moreover, large companies enjoying well-established dominance of the market usually have considerable human and financial resources at their disposal. Therefore they can afford to devote large amounts of money to research and development, which benefits the whole society. Finally, we should not be oblivious of the undesirable consequences of fierce competition, in the face of which companies such as airlines Market Structure 6 and the like might want to reduce their costs by lowering safety standards. From the above-mentioned facts we can draw the conclusion that, as the saying goes, every cloud has a silver lining. According to standard economic theory, a monopoly will sell a lower quantity of goods at a higher price than firms would in a purely competitive market. It is often argued that monopolies tend to become less efficient and innovative over time, becoming "complacent giants", because they do not have to be efficient or innovative to compete in the marketplace. The monopoly may be justified only when the consumers getting quality products at cheaper prices. In order to reduce other competitor interventions the organizations will offer lot of compliments and other benefits to the customers. It can be good to allow a firm to attempt to monopolize a market, since practices such as dumping can benefit consumers in the short term; and once the firm grows too big, it can be dealt with regulation. When monopolies are not broken through the open market, often a government will step in, either to regulate the monopoly, turn it into a publicly owned monopoly environment, or forcibly break it up. Public utilities, often being natural filiations and less susceptible to efficient breakup, are often strongly regulated or publicly owned. Different ways, in which the problems posed by monopoly, may be reduced. The market monopoly can be reduced only by the intervention of the government. The policies and the rules of starting business should be adjusted in such a way that it should not cause any problems to the existing firms. In the modern world of globalization and liberalization most of the business in public sector (Sector under government’s control) has give way for the Market Structure 7 private participation. Most of the governments are now encouraging the private sector participation in more areas. Now anybody irrespective of his country of origin or culture can work anywhere in the world and can establish business firms as well. The restrictions up on foreign investment is been liberalized by most of the countries. The needs of the local small companies also should be addressed. The permission to open MNC outlets should be carefully located so that it may not cause many problems to the local retailers. Local companies are always the wealth of the nation since what all they are earning is been utilized in their country only. On the other hand most of the profit gained by the MNC’s will always cross the boundary. A government can arrange local cooperation among the small companies to compete with the MNC’s even if they signed the regional trade bloc agreements. Such local cooperation among the local retailers can improve their collective competing power and efficiency to deal with the problems caused by monopoly. Even though the landscape of small business positioning in the global market is bleak, the future can bring about a profound change. If demand for the product of an imperfectly competitive industry increase, what happens to the product, the output of the industry and the profits of the firms within the industry? The product price will go high as there is not enough competition for the supplier of the product. Also such situations will result in reducing the quality of the product also. The consumers will not get enough opportunity to compare the product with some other similar products and hence they will be forced to believe that this is the one best you can get in the Market Structure 8 market. So helpless consumers will have to pay, higher prices than the deserved, for the monopolized product. The profits of the firms within the industry will attain higher values since they have not enough completion and the demand of the product is being high. In gulf countries drinking water bottlers “Masafi” has enjoyed such a monopoly for a long period. They have increased the price of their drinking water immensely and since they did not have many competitions from the market their profit margins were gone up. But now since the arrival of lot of other suppliers like “Oasis” they forced to make certain adjustments in the product and the price. How may the existence of barriers to entry affect the outcome? Many of us don’t understand the complexity and ambiguity of the term “barrier to entry” that is used frequently as a justification for breaking up companies or creating new regulations. It is the application of the term “barrier to entry,” not so much the resulting market equilibrium that is most debated among economists. An entry barrier is “a cost advantage that an incumbent firm enjoys compared to entrants.” An entrant and the incumbent both have equal ability to bid for customers and thus no firm would earn super competitive returns. Both of their works interpret the meaning of barriers to entry as factors that allow a firm to earn excess returns. Several factors were considered as barriers to entry and enabled a firm to enjoy normal rates of return. These factors included scale economies, large capital requirements, product differentiation, and cost advantage. Market Structure 9 Usual discussions concerning barriers to entry focus mostly on long run equilibrium and ignore many of the dynamics affecting when this equilibrium will be reached. Dynamics such as the presence of adjustment costs and the ability of firms to make credible commitments when there are sunk costs creating asymmetry between firms by allowing some to make binding commitments before others, all effect how long it will take for prices to reach competitive levels. The long run point, at which excess profits will cease, may be ambiguous (when one considers dynamics). This point may be far off, that time and energy is better spent examining the persistence and dynamics of superior competitive rates found across industries right now instead of ignoring many dynamics and developing an inaccurate predication for the long term. Conclusion In most of the case market monopoly is not desirable to the consumers. It will avoid the chances of the customers to compare and contrast with the products quality and prices. The monopolized product may always be of higher price and may not meet the required standards as well. Government should act properly to reduce or avoid the monopoly. . Market Structure 10 Sources 1. MONOPOLY AND COMPETITION Retrieved on 4/12/2008 http://mises.org/rothbard/mes/chap10a.asp 2. Charles C. Fischer - What Can Economics Learn From Marketings Market Structure Analysis? Retrieved on 4/12/2008 http://www.westga.edu/~bquest/1997/ecnmkt.html Read More