Competitive markets, monopolies, oligopolies as types of markets structures - Essay Example

?Market Structures Markets in the world are not homogeneous but, rather, characteristic depending on the prevailing market conditions. Markets are defined depending on how market conditions structure the market. This is a discussion on competitive markets, monopolies, as well as oligopolies as types of markets structures. Competitive Markets Competitive markets are characterized by unlimited number of buyers and sellers, all trading on the same or similar commodity in a manner that the prices of the commodity are largely determined by the market forces. Therefore, a single individual or a small fraction of the buyers or sellers has little or no impact upon the price. Once the prevailing market forces set the price, buyers or sellers have no option but to go with the offered prices. Large number of buyers and sellers, little or no entry or exit conditions, maximized profits, and mobile factors of production characterize the market too (Mankiw, 2011, p. 280). The prices in competitive market are usually determined by manipulation of marginal costs. Competitive markets aim at setting prices where marginal costs and total revenue are the equal or almost equal in order to maximize profits. These, in turn, are determined by demand and supply. A change in either demand or supply causes the price to shift and settle to an equilibrium position. In order to maximize profits, competitive markets always aim at setting the output such that the marginal costs are equal or almost equal top marginal revenue (Mankiw, 2011, p. 282). Competitive markets have little entry or exit barriers. The conditions of the market are such that any seller or buyer can enter or exit the market with little or no effort at all. Although the entry may consist of costs of input, such inputs are assumed negligible to affect the decision of preventing any willing entrant to participate in the market. It is undeniable that competitive markets are the economic drivers of market-oriented economy. Competitive markets allow any participant to participate in the market and, therefore, promote equitable distribution of economic resources and market opportunities. Monopolies Monopoly type of market structure refers to a market whereby there is little or no competition on the offered commodity. This means that the seller has a lot of authority and control over the market conditions such as price and supply. Some of the characteristics of monopolistic market structure include little quantity or absence of substitute products, large barriers to market entry, little or no competition, while seller has a great authority over market conditions, prices are determined by the seller, insignificant difference exists between the industry and firm. Additionally, the demand curve for monopolistic markets is downward sloping, which simply means the seller can sell less at a higher price, or vice versa (Nicholson, & Snyder, 2008, p. 491). Unlike in competitive markets, monopolistic markets have the upper hand in setting market prices. Since the firms or the sellers have little to worry about competitors, they can set the prices above the marginal costs. They can set the prices above the normal profits as would be in the case of competitive markets. Additionally, the seller can influence supply, thereby determining the price by either selling more at a lower price or selling less at a higher price. The maximum possible price will be where marginal cost, marginal revenue, and demand curve intersect. Although monopolies can maximize profits in several ways, the output is largely determined by marginal cost and marginal revenue. The seller will continue increasing the output, as long as marginal costs are lower than marginal revenue. The maximum profit will be realized when the difference between marginal revenue and marginal cost is maximum. Since the seller is the price determinant, it is possible to regulate the output such that the profit obtained is maximized when other market conditions are considered. Monopoly markets have many market entry barriers as compared to any other form of market structure. Some of the entry barriers include high startup costs, high costs of infrastructure, trade secrets, as well as governmental regulations. It is also possible to have a natural entry barrier, whereby the existing seller has already established the business and started to enjoy economies of scale. Other willing entrants are unable to make entry since the costs involved are not justified by the possible profits and the existing seller is already offering low prices due to economies of scale (Nicholson, & Snyder, 2008, p. 492). Monopoly markets are important aspects of the economy. This is because they are able to make profound developments and meaningful inventions in products and services since they are not limited by funds. Monopoly markets mostly serve in areas where other forms of market structures may not work efficiently. For instance, monopoly markets, such as water services, provide services in a more efficient way than competitive markets where many service providers would cause chaos to the market. Oligopolies Oligopoly is a market structure whereby few sellers dominate the market. Unlike in monopoly form of market structure, oligopoly players can hardly make independent decisions since the other market players will react in response. Therefore, the decisions of one player are under the influence of the others. Few large firms characterize the market structure, each firm is appreciably large in comparison to the overall market, similar or close substitute products, and large barriers to entry (Hirschey, 2008, p. 511). Oligopoly markets have a complicated price determination mechanism. This is because any action by one of the sellers will cause a corresponding action from the other oligopoly players. The firms may collaborate and set the desired prices, as is in the case of monopolistic markets. Due to competition between the firms, prices are most likely to be the same for all oligopolistic firms. The prices are set where marginal cost equals marginal revenue. Any increase in price causes buyers to move to other sellers, whereas a price reduction causes other sellers to reduce their prices too. Oligopoly markets experience a kinked demand curve (Hirschey, 2008, p. 514). The output determination under oligopoly market structure may not be straightforward since other firms will respond to any change in output from one of the firms. However, an output realizing the maximum profits may be achieved when the output curve cuts the marginal revenue curve. There are many barriers to entry into oligopoly market. Some of these barriers include large startup capital, high costs of business infrastructure, and government regulations. It is also possible to have a natural entry barrier whereby the existing seller has already established the business and started to enjoy economies of scale. Other willing entrants are unable to make entry since the costs involved are not justified by the possible profits and the existing sellers are already offering low prices due to economies of scale. The existing firms may be having great control over product or service patents, or control over the primary raw materials, thereby discouraging other willing entrants. It is also possible for the existing market players to collude or merge in order to make it unfavorable for other entrants to venture into the market. Oligopoly market structure is, arguably, the most beneficial to the economy. Due to the availability of enough resources and competition between the players, it becomes necessary to invent and innovate. The aspect of competition forces the firms to offer their products and services at a low price, thereby benefiting the consumers. Additionally, the economies of scale make it possible for the oligopolistic firms to offer low prices. This would not be possible with other forms of market structures, especially competitive markets. References Hirschey, M. (2008). Managerial economics. London: Cengage Learning. Mankiw, G. (2011). Principles of Economics. London: Cengage Learning. Nicholson, W. & Snyder, C. (2008). Microeconomic theory: basic principles and extensions. London: Cengage Learning. Read More