Market Structure for Buying and Selling Products - Example

Running Header: Market Structure Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Introduction According to Tucker (2010), market structure refers to the extent in which competition prevails in a given market. The level of competition is mainly determined by the number of buyers and sellers, and by the nature of the products. Additionally, competition is determined by the degree in which information flows in a given market. The structure of a market affects the pricing decisions of firms as well as their profits. The aim of this paper is to describe various market structures and to provide a real-life example of each market. Perfect Competition Perfect competition is a market whereby there are many sellers offering identical products (Lipsey & Chrystal, 2011). Under this market, the prices of products are determined by the forces of demand and supply. Firms operating in this market are assumed to have perfect knowledge of the prevailing prices. Examples of perfectly competitive markets include the unskilled labor market and the agricultural market for eggs. Tucker (2010) notes that in the long run firms operating in a perfectly competitive market can leave the industry if they earn below normal profits and new firms can enter the market if the existing firms earn abnormal profits. Thus, high entry barriers in this market will prevent entry of new firms hence the existing firms will be able to earn supernormal profits in the long run. In a Perfect competition, firms are cost efficient because they produce at a point where price is equal to marginal cost (McEachern, 2010). However, high entry barriers cannot influence cost efficiency because firms only produce at a level where the total average cost is at a minimum. The price of a product in a perfectly competitive market is determined by the forces of demand and supply and not by the firms (Tucker, 2010). Accordingly, inefficient firms may not survive in this market structure even with high entry barriers because they might earn below normal profits. Furthermore, in a perfect competition all firms sell homogenous products. However, the fact that firms are price takers means that entrepreneurs may not be motivated to produce substitute products In a perfectly competitive market, output is standardized hence buyers do not distinguish products manufactured by individual firms (Ernest & Liberman, 2007). This makes firms to face a demand curve that is perfectly elastic. Additionally, firms are price takers and thus a change in price by one firm does not affect other firms. Entry of government does not affect the pricing ability of a perfectly competitive market because prices are determined by the forces of demand and supply. However, international trade may affect this market structure because it can increase the level of competition and drive down prices. Monopolistic Competition According to Tucker (2010), a monopolistic market structure is a market that has a large number of small sellers who offer differentiated products. In this market there are low barriers to entry hence short-term profits attract new entrants in the long run. Thus, high entry barriers can prevent new entrants and this means that existing firms can enjoy high profits in the long-run. Under monopolistic competition firms have partial control over the price of their products (McEachern, 2012). However, a firm must be efficient in this market structure because when it raises its prices above the average market prices it may lose its customers. Therefore, firms are cost efficient in this industry even with the existence of high entry barriers. Consequently, inefficient firms may not survive in this industry because of the high competition. An example of monopolistic competition is the T.V sets industry which is characterized by many firms which manufacture similar but differentiated products. High entry barriers can motivate entrepreneurs to develop substitute products in order to attract buyers. By creating differentiated substitute products, entrepreneurs can be able to earn supernormal profits (Tucker, 2010). According to McEachern (2010) firms operating in monopolistic competition have an elastic demand curve. The presence of close substitutes under this market structure makes the demand curve to become more elastic. Furthermore, when one firm reduces the prices of its products other firms react by reducing their prices by an equal margin. The presence of many firms in this market structure implies that governments have no role in pricing products. In contrast, international trade can affect this structure by increasing competition. International firms can be able to overcome the low barriers in this market and thus increase competition. Oligopoly Mankiw (2011) describes an oligopoly as a market structure with few large firms that dominate the whole market. This market structure is characterized by existence of entry barriers. Thus, in the long-run firms in an oligopolistic market may earn abnormal profits. Hirschey (2008) notes that cost efficiency is violated in oligopolistic markets because marginal revenue and price differ. An oligopolistic market is non-competitive hence it is cost inefficient. Furthermore, inefficient firms can survive in this market structure due to low competition and the ability of firms to collude. An example of this market in the country is the airline industry which is characterized by a limited number of carriers. Oligopoly market has a small number of sellers and this may motivate them to act jointly and charge high prices (Tucker, 2010). As a result, entrepreneurs may be motivated to produce substitute products so as to attract customers because firms may be reluctant to reduce their prices. The demand in an oligopolistic market structure is price inelastic and price elastic (McEachern, 2010). This is because if one firm decreases its prices other firms are also forced to reduce their prices thereby making the price to be inelastic. However, when one firm increases its prices other firms do not adjust their prices hence making the demand to be elastic. Furthermore, the ability of firms to collude and set the market prices in this market structure means that the government has a role in controlling prices. Finally, international trade does not affect this market structure due to the existence of barriers to entry. Monopoly Market Structure A monopoly is a market structure that is characterized by a single seller or producer (Tucker, 2010). Under this market structure, there are barriers to entry and the seller produces or sells a unique product. McEachem (2010) observes that in the long-run a monopoly earns normal profits. This is because the barriers to entry prevent new firms from entering the market hence the firm is able to maintain its short-run economic profits in the long-run. The marginal cost and price of a monopoly are different and this makes monopolies to be cost inefficient. According to Taylor and Weerapan (2011), monopolies do not minimize their total cost and this makes them to be inefficient. Furthermore, the lack of competition implies that an inefficient firm can survive in this market structure. An example of a monopoly is the U.S postal service which monopolizes mail services in the country. Entrepreneurs may be highly motivated to develop substitute products in a monopoly market. A monopoly may charge high prices and at the same time offer poor services (Tucker, 2010). This can in turn act as an incentive for entrepreneurs to develop substitute products. Monopolies have a demand curve that is perfectly inelastic (McEachem 2010). The demand of the product produced by a monopoly remains unchanged with changes in prices. Besides, the government has a role of setting price celling in this market structure. A monopoly market is characterized by lack of close substitutes and this can motivate a firm to exploit its customers by charging high prices hence the need for government intervention. Finally, the existence of barriers to entry means that international trade cannot affect a monopoly. Competitive pressures and high Market Barriers Markets with high entry barriers have low competitive pressures. According to Gwartney, Stroup and Sobel (2009), in markets with high entry barriers, few new firms are able to enter the industry. This in turn reduces the intensity of competition in such a market. On the contrary, when there are low barriers to entry, new firms can easily enter the industry hence this increases rivalry among the companies thereby increasing the competitive pressures. Market Structure for Buying and Selling Products I would prefer a monopolistic market for buying products. In a monopolistic market, there are many sellers of a commodity who offer differentiated products (Ernest & Liberman, 2007). Thus, unlike in a perfectly competitive market where products are homogeneous, a monopolistic market would offer me with alternative choices of products. Furthermore, the existence of a large number of firms in this market structure means that competitors influence the pricing policies of individual firms. A monopoly is a form of a market structure in which one firm is the sole producer of a service or a good. Monopolies are price makers and this is in contrast with competitive markets where firms are price takers (Hirschey, 2008). Therefore, monopolies can earn abnormal profits in the short-run and in the long-run. On the contrary, a firm in an oligopolistic market may not be able to earn abnormal profits due to price leadership. Thus, I would prefer to sell products in a monopoly. Conclusion A Perfect competition refers to a market where there are many sellers offering identical products while a monopolistic competition is characterized by a large number of firms which sell identical products. Thus, a monopolistic structure is the ideal market for buying products because it offers as variety of alternatives. On the other hand, an oligopoly market structure is characterized by a few but large firms that dominate the market. Conversely, a monopoly structure contains a single seller which is the sole supplier in the market. Finally, markets with high entry barriers have low competitive pressures due to lack of new entrants. References Ernest, R., & Lieberman, M.(2007). Microeconomics: Principles and Applications. Mason, Cengage Learning. Gwartney, D., Stroup, R., & Sobel, R.(2009). Economics: Private and Public Choice. Mason, Cengage Learning. Hirschey, M.(2008). Managerial Economics. Mason, Cengage Learning Lipsey, R., & Chrystal, A.(2011). Economics. Oxford, Oxford University Press. Mankiw, G.(2011). Principles of Economics. Mason, Cengage Learning. McEachern, W.(2010). Economics: A Contemporary Introduction. Mason, Cengage Learning. Taylor, J., & Weerapana, A.(2011). Microeconomics. Mason, Cengage Learning. Tucker, I.(2009). Survey of Economics. Mason, Cengage Brain Learning. Read More