General Idea about the Various Market Structures - Example

Microeconomics School Microeconomics Overview The purpose of this paper is to provide a general idea about the various market structures (for example perfect competition, monopoly, monopolistic competition, and oligopoly) as explained by different research works. They are further explained with their key assumptions and examples. An application of some global market factors such as demand, pricing decisions, competition, market decisions and customer expectation is also provided in brief. Further, the readers will find the document useful while going through the analysis of the impacts of some factors on the UK business organizations. 2. Perfect competition Definition In Perfect competition structure of market, the following five features exist: 1) All the firms are unable to control their products’ market price and, hence, are price takers; 2) All the firms are engaged in selling identical product; 3) All the firms possess a comparatively lesser market share; 4) the industry shows a character of the freedom regarding entry and exit; and 5) The buyers have got full information regarding the prices charged and the products being sold by each entity. Another name sometimes used for the Perfect competition is "pure competition" (McConnell, Brue & Flynn, 2011, p. 107). Assumptions There are many suppliers and each of them has an insignificant market share. Every firm is so small that it cannot affect price by changing the market supply. Hence, every single firm acts as price taker. Each firm produces identical output. In other words, each firm produces omogeneous/similar products that are each other’s perfect substitutes. Consumers are fully aware of the prices The transactions bear no cost. Sellers and buyers do not incur any costs for making an exchange. All the firms (new entrants and industry participants) have obtained equal access to the resources (technological equipment, say). No barriers, in long run, to entry & exit of firms. The market remains open to have competition from fresh suppliers. No externalities in consumption and production. Price taking firms Firms in the perfectly competitive market structure have little direct impact on the presiding market price. Hence, these they are termed as price takers as they will have to fix a price that most of the customers need in order to have high sales. If these firms will try to set their own prices, they will lose customers due to perfect competition in the market (Krugman & Wells., 2012, p. 87). Examples quoted for price-taking behavior may be: Resident growers making supplies to large superstores. RJB Mining vending coal to power generators. A native steel firm retailing the highest possible quantity at the presiding international steel price. When maximum firms in a marketplace are price takers, only a minor percentage variance in the prices of the products selected within the market will be there. The principal of single price may become true (i.e., majority of the present firms make sales at the prevalent price. Examples It is exceptional to discover a pure instance of perfect competition. However, some close approximations are there, for example: Foreign exchange dealings: Numerous buyers & sellers Similar product - Euro or the US dollar Each dealer is, usually, small comparative to total marketplace and requires taking the given price. Traders, sometimes, can move the currency markets. Agricultural markets: Pig agriculture, cattle. Farmers markets for tomatoes, apples. Wholesale markets for flowers, fish, fresh vegetables. Street food markets structure prevailing in developing countries. 3. Monopolistic competition Definition It is a competition type inside an industry where: 1. all the firms are competent to enter the industry when the profits seem attractive. 2. All the firms manufacture similar, though, not perfectly interchangeable products. 3. All firms maximize profits. 4. All firms possess some market power. It means nobody is a price taker. Assumptions In many societies, markets, like the restaurant market and the retail clothing market can be defined as good estimates of monopolistic competition. Here are the main assumptions of this model: Many sellers occur in the market. Each seller manufactures a similar product, though not identical, to the merchandises produced by its rivals. This is called as product differentiation. Very few hurdles to entry exist. Price maker A monopoly firm is always the only seller in the market and hence has complete control upon total market supplies and the market prices. As a result, a firm functioning in a monopoly market announces its charges in such a way that the firm’s marginal revenue for the magnitude demanded by consumers at the same market price is equal to its marginal costs. In this way, the firm selects the market price and the total amount if a product supplied in the market, and is therefore called a price maker. Examples Here are some common instances of monopolistic competition: The first one, of course, is the instance of clothing. Even if any specific piece of clothing, for example a simple shirt, is taken, there will be seen several manufacturers and nearly the entire world populace as the consumers. The goods manufactured, although not similar, tend to have resemblance in them. This one, among all the instances of monopolistic competition, is the universally applicable. Another very good example is the stationery manufacturers. They manufacture the same item, but no congruence is there. The example of farmers is also a very fine illustration for monopolistic competition. Farmers yield crops for the whole world population, but, once more, they have distinct features by virtue of things alike quality and size. 4. Monopoly Definition A monopoly firm is the one which is the only seller of its produce, and where it has no near substitutes. A loose monopoly can influence prices as it has market power. Monopolies rise due to: The firm owns a key resource. The overheads of manufacture make one manufacturer more competent than many, due to growing returns to scale. It is termed as “natural monopoly.” The supervision/government offers a firm the special right to produce a product. Assumptions of monopoly The three key assumptions of monopoly are as follows: Single firm There is a sole firm, in a monopoly, which manufactures all the production of the industry. In other words, the industry and the firm are synonymous. As a result, the demand curve that is faced by the monopolist is in fact matching to that of the industry demand curve. Unique product The monopolist, unlike perfect competition (where all the firms produce matching products), manufactures the only merchandise. Simply, there are no near alternatives being manufactured by other firms. It means that customers can buy output only from one firm. For example, in the UK, traditionally, prior to the deregulation of 1980s and 1990s, the customers could buy telephony (British Telecommunications), gas (British Gas) and postal services (Post Office) only from a single dealer. Barriers to entry Among the key reasons for why monopolies rise and are continued, is that there exist barriers to competition (barriers to entry and exit, more specifically). Barriers to entry, generally, can be defined as everything that keeps a potential entering competitor at a competitive weakness relative to the firms previously recognized in the industry (Mankiw, 2011, p. 301). Barriers to entry can rise in three means, namely the structural barriers (technical situations prevalent in the industry), legal barriers (government regulations) and strategic barriers (by the activities of recognized firms). Various regulations and acts constitute legal barriers come. Price maker As, in the market, there is only a single firm, the demand curve of the firm is identical to the market demand curve. A monopolist, unlike a firm in the perfectly competitive market structure, is a price maker. It selects the price at which its product is to be sold. It also chooses the quantity to be offered for sale. A monopolist always has a market power (Depken, 2005, p. 109). Examples of monopoly Following are the examples of monopolies Windows and Microsoft DeBeers and diamonds A local natural gas company. 5. Oligopoly Definition An oligopoly refers to a market structure where a few firms lead. When a market is jointly shared among few firms, it is supposed to be highly focused. Though, only few firms lead, it is likely that many minor firms may also function in the market. As for instance, key airlines like Air France and British Airways (BA) work their directions with only a little close rivals, but there are also numerous small airlines/carriers offering specialist services or catering for vacationer. Assumptions The little sum of oligopolistic markets as listed segment the following characteristics: A small total of big firms is there in the market (simply, a small total of firms hold the main portion of sales in the market). The merchandise may be identical. There are tough barriers to entrance. Firms identify their shared interdependence and involve in strategic behavior. Price maker Since there are a small number of firms in the market, they can drive the price of their own upon the customers. As there is no sufficient competition in this market, the firms are free to choose their own prices as the customers are compelled to buy the same product even with high prices as there are no close competitors (Pindyck & Rubinfeld, 2012, p. 491). 6. Various market forces Pricing decisions The pricing decision is a serious matter for maximum marketers, yet the extent of care given to this important area is frequently much less compared to that specified to other marketing decisions. One cause for the deficiency of attention is that numerous people believe that price setting is an automatic process that requires the seller to utilize financial tools to shape their case for fixing price levels (Hubbard & OBrien, 2012, p.293). While financial tackles are extensively used assisting the setting of price, dealers must consider numerous other issues when arriving at the worth for which their merchandise will sell. Customer expectations Perhaps the most clear external aspects that effect price setting are the prospects of channel partners and customers. As already discussed, when it comes to make decision to purchase, customers evaluate the whole “value” of merchandise much further than they evaluate the price. When determining a price, dealers need to conduct buyer research to find what “price points” are suitable. Pricing outside these price points might discourage clients from purchasing. Firms inside the dealer’s channels of supply also must be measured when determining price. Distribution partners guess to receive financial reward for their struggles, which generally means they will collect a proportion of the concluding selling price. This margin or percentage among what they pay the dealer to acquire the merchandise and the price they receive from their clients must be enough for the supplier to cover their overheads and also earn a wanted profit. Market conditions Since most dealers are involved in actions designed to induce customers to expend their money, it makes logic that a vital external power/force is economic conditions. The economic analysis stays at how a distinct group produces, allocates and utilizes goods and services. These groups can vary from those demarcated very broadly to those demarcated narrowly (Pindyck & Rubinfeld, 2008). Surely, the production, supply and consumption of goods are also of great interest to dealers and, in fact, numerous leading researchers of marketing initially studied economics afore moving to marketing. Marketers try to evaluate extreme fewer economic variables favoring to focus on those variables that disturb spending conduct of businesses and consumers. Competition For many dealers the final external power is the one greatest relevant to instant daily decision making. Though the other ones discussed above tend to be inspected periodically, monitoring competitor action is often a regular undertaking (Perloff, 2011, p. 59). Monitoring competitors can have several purposes: Competitors as Threats The clearest reason to observe the competition is to realize how they are replying in the same marketplaces in which the dealer operates. Numerous larger companies identify the importance of keeping tags on their rivalry and create particular locations or even sections that focus on collecting and analyzing rival data. Competitors as Partners While many may ponder competitors as signifying the antagonist, there are circumstances where competitors can provide opportunities. This often occurs in large companies that offer a wide-ranging product line helping many objective markets. In some marketplaces a company may contest violently with another firm however in other marketplaces both firms might be covering and it might make more logic for both to effort together. Competitors of Tomorrow Generally, in many industries, and particularly, in those industries which are technology-focused, where there is substantial stress on research and development (R&D), the most hazardous rivals are those that have yet to arise (Boyes & Melvin, 2012, p. 321). As technology-dependent industries, like consumer electronics, computers and pharmaceuticals, depend heavily on innovative fresh products, serious rivals can emerge rapidly from what looks to be out of nowhere. 7. Organization selection for the project H Shackleton is among the oldest family businesses in Abergavenny, which was founded in spring 1873 by George William Shackleton. It has celebrated about 134 years of its business with almost fifth generation of this family on the course of running the business. The business of the company flourished and in 1898, second shop was opened at location 26 High Street and was transferred to his son, George Harry Shackleton who by profession was a Chemist and Druggist. The business in High Street however stayed for only one year before in 1899 it moved to 9 Cross Street, where the same business was traded until 1992. In 1980 in Nevill Street, Abergavenny, the former S V Kents chemist premises was taken over by the company. The company has now six premises: two of them are pharmacies and in Abergavenny a photographic shop, one pharmacy in Ebbw Vale, Beaufort, and two in Hereford. 8. Global factors shaping the business environment Information technology Changes in information technology will certainly change the structure and shape of the business environment. If there is a change from paper work to computer based workings of files and data control, there will be seen a change from physical worker oriented organization to computer experts style of organization structure for keeping these records. Terrorism Terrorism is a very important factor in changing the business environment of a particular area. If there are some threats to the successful operations of the investing companies, the company will never invest in that particular area. In fact most of the existing companies will wind up their operations in that area leaving a few other companies there. This non-investment from new companies and stepping back of the existing companies will make the market sufficiently less competitive for the existing companies and, hence, whole of the market structure will change. UK business organizations and international trade International trade is the interchange of capital, goods and services across boundaries. Benefits of international trade comprise importing goods that cannot be manufactured locally, greater resources utilization, and increasing the range of choice to customers. However, international trade might be linked with shortcomings as well, for example high level of reliance on external markets and loss of native jobs. Importance of international trade to business organizations in UK can be clarified by mentioning the concept of relative advantage. According to this concept, trade among two nations can be made in a jointly beneficial way, if each nation has relative advantage to produce goods to be traded. The following case studies clearly show the advantages of international trade to businesses in the UK. 19th century’s one of the prominent English economists, David Ricardo uses the examples of Portugal and England manufacturing cloth and wine as shown in the table. According to the given table, England holds relative plus in manufacturing cloth as it required less labor hours. On the other hand, Portugal has comparative advantage in wine manufacture, as it requires only 80 hours producing wine as related to 90 hours to manufacture cloth.   Cloth Wine Ratio of price of wine to the price of cloth Ratio of price of cloth to the price of wine England 100 120 1.2 0.83 Portugal 90 80 0.88 1.12 Concept of comparative/relative advantage Source: Hunt and Lautzenheizer (2011) In simple words, England has got the ability to produce each piece/unit of cloth for lesser prices paralleled to wine, while for Portugal, it is inexpensive to manufacture each piece/unit of wine than manufacturing each piece/unit of cloth. Therefore, if both England and Portugal focus on manufacturing goods within their comparative advantage, and involve in international trade, they can consume extreme amounts of cloth and wine. Similarly, influence of international trade to businesses in UK can be demonstrated by using the case lessons of Aquaco and Martin Lishman. Aquaco is grey water reusing and rainwater collecting company founded in Kent, UK. It sells its goods and services to 14 countries and the statistics show that the international sales for the company amounted to around 35% of its overall revenues Similarly, Martin Lishman is a UK founded manufacturer and supplier of specialist apparatus/equipment for the environmental, agricultural and building industries. This company generates considerable parts of its incomes from international sales transferring its goods globally to more than 20 countries. UK business organizations and global factors U.K business organizations are significantly affected by the global factors. The business factors are not the same throughout the whole globe. They mostly differ from country to country. Like pricing decisions are dependent on the type of market structure in which a particular business organization is working in i.e. perfect, imperfect monopolistic or oligopolistic competition. Similarly, the customer expectations also have a significant effect on the trading of these business organizations like in Muslim Countries those products will be highly used and appreciated which are labeled as Halal and have ingredients which are acceptable to the Muslims. The other major global factor is the competition. Like if in a particular country there is economic and financial boom period and there are large number of entries of the business organizations into the industries an everyone offering for the same products or services at a lower cost, then this competition will significantly affect the business organizations as they will have to keep in mind that their competitors are providing the same sort services and products at the low prices. Another global factor is Demand. It also differs from country to country for a particular product like vine etc. demand will be sufficiently higher in slim countries as compared to the Muslim countries. Similarly in the same way Supply will also be affected as the demand will be low so the supply for a particular product will also be low in a specific country as compared to other countries. These five are the main global factors that usually have effects on the business of organizations if they opt for expanding their business in different countries. UK business organizations and the policies of European union England is bound by the agreements and deals of the EU and judgments made by the government must be consistent with these agreements. For example, the growth and stability deal which means that England cannot let its budget shortfall to go overhead a certain total for much long or the fact that the agreements prevent monopolistic taxes on European goods. UK is also bound by commands and rules that the European Union makes that it is pleased to make regulations in its own country. Equality legislation, for instance is a consequence of equality directions in the EU. The EU also effects through worldwide plans like the antipoverty plans in the 1990s sponsored by the EU: these plans worked with community groups and national civil servants and introduced new ideas and models which became united into poverty strategy in many countries. There are also easier contracts and international observing groups that hide information amongst each other regarding how to best make strategy that also affect the structure of the strategy and legislation. References Hunt, E.K. & Lautzenheiser, M. (2011) History of Economic Thought: A Critical Perspective M.E. Sharpe McConnell C., Brue S. & Flynn S. (2011) Microeconomics McGraw-Hill/Irwin; 19 edition Krugman P. & Wells R. (2012) Microeconomics Worth Publishers; Third Edition edition Mankiw N. G., (2011) Principles of Microeconomics Cengage Learning; 6 edition Depken C., (2005) Microeconomics Demystified: A Self-Teaching Guide McGraw-Hill; 1 edition Pindyck R. & Rubinfeld D. (2012) Microeconomics Prentice Hall; 8 edition Hubbard R. G. & OBrien A. P. (2012) Microeconomics Prentice Hall; 4 edition Pindyck R. & Rubinfeld D. (2008) Microeconomics Prentice Hall; 7 edition Perloff J. M. (2011) Microeconomics Prentice Hall; 6 edition Boyes W. & Melvin M., (2012) Microeconomics Cengage Learning; 9 edition Read More