Current Market Structures - Example

Market Structures Name Course Name and Code Date Introduction The current market structures strongly exhibit that international trade is widely changing which has resulted into firms enjoying less market powers than before. Business organizations are moving from being price setters to price takers. For instance, initially, firms had immense market power; had power over terms and conditions of exchange, currently, this power are increasingly diminishing thus rendering firms less powerful in the marketplace. Considering how the international market is changing the paradigm of market structures, this paper is seeks to describe how firms’ market power is being reduced through utilization of economic principles of perfect competition, monopolistic competition, oligopolies, and monopolies as well as consumer surplus and producer surplus. Perfect competition This is a theoretical market structure that is used as a reference point against which other real market structures are compared. In this market structure, no firm is considered large enough to posses the market power to set the price of homogeneous products (Arnold, 2013). This is mainly due to the fact that perfect competition conditions are strict (Boyes, 2011). Perfect competition market structure is characterized with conditions such as: All market players sell an identical product All firms are price takers; they have no power to control the market price of their commodity Market players have a relatively small market share Buyers have complete information with regard to the product being sold together with the price that each firm charges, and The industry has neither entry nor exit barriers. Under this scenario, there are many buyers and consumers, and hence the market price shows a perfect reflection of supply and demand. Accordingly, consumers have many perfect substitutes in the event that the product or service they wish to purchase becomes too expensive or the quality is compromised (Arnold, 2013). This scenario also allows new companies to easily enter the market, which on the other hand generates additional rivalry (Gottheil, 2013). Similarly, this market structure only allows firms to earn enough profit to maintain their businesses or for survival; this is mainly because if they to earn more profits they risk other companies entering the market which will eventually drive the profits down or to the minimum (Boyes, 2011). It should be noted that perfect competition only exists in theory, in real-world competition; companies differentiate their products from those of competitors (Arnold, 2013). Accordingly, they promote their products to gain market share, they reduce prices to attract more customers, and in some circumstances, they raise prices to make profits. Monopolistic competition This is also referred to as imperfect competition where firms sell products that highly differentiated from one another through branding and product quality thus there are no perfect substitutes. Under this structure, the company takes the prices charged by competitors but ignores the effect of its own prices on the prices its rivals (Boyes, 2011). Monopolistic competition is different from perfect competition due to the fact that production does not occur at the lowest possible costs. For instance, firms have excess production capacity. Key characteristics of monopolistic market structure include: All companies produce similar but not perfectly substitutable products All firms in this market structure can enter the market if the profits are attractive All firms strive to make high profits The firms also have market power to some extent and thus they are not price takes but price setters. In the same line of discussion, in monopolistic competition there are many producers and many customers in the market however, no firm has total control over the market price (Arnold, 2013). Additionally, consumers perceive that there are non-price differences with regard to competitors’ products. Unlike perfect competition, in monopolistic competition there are few entry and exit barriers. In addition, more importantly, firms can control price to a certain extent (Boyes, 2011). Oligopolies This is a market structure where supply of commodities is controlled by a small number of firms each of whom has the capacity to influence product prices and hence can directly affect the position of competitors. In this regard, the industry is dominated and operated by a small number of sellers. This situation can arise because of various firms merging with a singular objective of reducing competition while raising product prices for consumers (Arnold, 2013). Given this scenario, each oligopoly has a higher probability of knowing the activities of the other oligopolies. With this respect, the decision of one firm can influence or be influenced by the decisions of other companies. Oligopolistic competition can result into various outcomes; for instance, some companies may decide to use restrictive trade practices in order to raise prices as well as restrict product production like it is in a monopoly (Arnold, 2013). For instance, this is a clear example of a cartel; this is more prominent in gas market. OPEC is a perfect example of an oligopoly. Accordingly, in oligopolistic market structure firms strive to stabilize unstable markets in order to reduce the risks associated with the market for investment and development of products (Boyes, 2011). In other situations, there is fierce competition between oligopolies particularly where there are relatively low prices and high production (Vagliasindi & Besant-Jones, 2013). This has been found to result into efficient outcome that is towards perfect competition. In this particular market structure, competition can be immense when there are more firms operating in the same industry. Oligopoly is characterized by Barriers to entry and exit are high The number of firms is few Long run profits Have the ability to set prices Product differentiation Interdependence among firms Non-price competition Monopolies A monopoly is a market structure where there exists only one producer/seller for a given product; a single business entity represents the entire industry (Arnold, 2013). In general is a single supplier market. Entry to such markets s largely restricted because of high costs together with other impediments that may be political, social, and/or economical (Boyes, 2011). For instance, the government may decide to create a monopoly over the industry that it wants to take control (McEachern, 2012). For example, the Saudi Arabia government has the sole control over the oil industry. A monopoly is usually formed for reasons such as: When the firm owns exclusively scarce resources for example: Microsoft owns windows operating system brand The government(s) can give a company a monopoly status Manufacturing companies may have patents over designs, copyright over images, ideas, characters, sounds or names which give them exclusive rights to sell products or services. A monopoly can also be created following a merger of two or more companies. Monopolies are characterized by: i. Have the ability to maintain exponential profits in the long-run ii. They have no close substitutes which is the basis for their super normal profits iii. The monopolist has immense power in the market thus can control prices iv. Barriers to entry are very high Consumer surplus Consumer surplus is a condition where the equilibrium price is lower than the highest price the consumers are willing to pay. In this essence, the amount the consumer actually spends is determined by the market price they pay (P) and the quantity they buy (Q); in this regard, the area represented by PBQC. Given this scenario, there is a net gain to the consumer due to the fact ABQC is greater than PBQC (Boyes, 2011). Consumer surplus in this essence is the net gain aforementioned; this is the total benefit; Area ABQC minus the amount spent PBQC (ABQC – PBQC = ABP). Consumer surplus is the financial gain received by consumers due to the fact that they are capable of purchasing a product for a price that is below the highest price they would be willing to purchase that commodity at (Arnold, 2013). Producer surplus Producer surplus is the price higher than the minimum price at which the producers are willing to produce (Arnold, 2013). It also said to be the additional producer private benefits especially in terms of profit received when the price they gain in the market is higher than the minimum they would be prepared to supply for (Kumar & Siddharthan, 2013). It is the reward the producer receive that covers their production costs. From the graph above, producer surplus is derived by companies in the market is represented by EPB (Boyes, 2011). Producer surplus in this regard is said to be the amount that producers gain by selling their products at a market price that is more than the least price they would be willing to sell that product for. Conclusion The discussion above provides an inherent understanding with regard to how market power is increasingly diminishing which has on the other hand made firms to be less powerful in the marketplace. The perfect competition market structure provides a situation where a firm has no influence in the market; for instance, all firms sell the same product which means consumers have a wide range of perfect substitutes. In this essence, companies have the capacity to only make profits that will only sustain their operations within the market. Monopolistic competition, on the other hand is the opposite of perfect competition. For example, firms sell products that highly differentiated from one another through branding and product quality thus there are no perfect substitutes. Oligopoly is where supply of commodities is controlled by a small number of firms each of whom has the capacity to influence product prices and hence can directly affect the position of competitors. Monopoly on the other hand, only one company produces and sells the products. Consumer surplus and producer surplus have also been discussed. References Arnold, R. (2013). Economics, 11th Ed. London: Cengage Learning Boyes, W. (2011). Managerial economics: Markets and the firm, 2nd Ed. London: Cengage Learning Gottheil, F. (2013). Principles of economics, 7th Ed. London: Cengage Learning Kumar, N., & Siddharthan, N. (2013). Technology, market structure and internationalization: Issues and policies for developing countries. London: Routledge Publishers McEachern, W. (2012). Economics: A contemporary introduction, 10th Ed. London: Cengage Learning Vagliasindi, M., & Besant-Jones, J. (2013). Power market structure: Revisiting policy options. New York: World Bank Publications Read More