The Grapes of Wrath: Market Structure Analysis - Essay Example

The Grapes Of Wrath - A market structure analysis Pure Competition Chapter 25 of The Grapes of Wrath speaks about the Californian land owners and their crops during the spring. There are cherries, oranges, peaches, pears and grapes everywhere and the earth smells of ripe and fresh fruits. The owners stand by and calculate their profits for that year. But the country is in a state of depression and there are hungry and downtrodden everywhere. The owners soon realize that their produce is not going to bring in the gains they had calculated. There are millions of producers around them but the buyers don't have money and can't afford the good crops. The producers can't afford the labor without selling their crops. Their debts build up and their crops are left to ruin. In a perfectly competitive market, there are many buyers and sellers and therefore no individual player can influence the market as a whole. Hence the firms become "price takers" by accepting the price determined by the intersection of the demand and supply curves. Therefore the firm's demand curve is perfectly elastic and price equals marginal revenue as shown in the graph. Individual firms cannot increase prices due to the competitiveness of the market and the highly elastic demand curve. Hence there are normal profits to be gained for the producers. The products are homogenous and therefore the buyers are indifferent as to which firm they purchase from. There are no barriers to entry or exit; hence firms can enter and leave the industry with no cost liabilities. In such a competitive environment, there is maximum efficiency and competent allocation of resources with minimum wastage. Consumers benefit from purely competitive markets because prices are as low as can be achieved. More sellers lead to more substitutes and better choices for consumers. However, it is most often seen that it is the middlemen and big corporate who benefit the most by making the most profit. Monopolistic Competition A trace of monopolistic competition is found in chapter 13 of the book where the Joads stop to fill gas at a gas station. The owner of the station is characterized as a crushed man, one who is afraid of the change that the world around him has embraced. He talks about how he sees cars move west all day and the only ones that stop in his station are the ones that have no money. They exchange beds, baby buggies, pots, pans, dolls, even shoes for the gas. The rich cars, however, stop only at company stations in town. He refers to these stations as the yellow painted ones in town. We also notice how the owner tries to imitate the company stations with the yellow paint but fails because of the loose hangings and the old cracks in his beaten old station. Monopolistic competition or imperfect competition is relatively similar to that of perfect competition except that the products are not homogenous. There are large number of players in the market, but due to differentiation of products, each individual firm has a small market share and a limited ability to influence prices. In this market, the barriers to entry are very small and there is sufficient product knowledge among the consumers. Product differentiation, which is the characteristic of monopolistic competition, creates a difference between products by deeming them similar but not identical. The product of one producer can be differentiated from that of another. A competitive producer uses non price competitive methods such as advertising, packaging, brand names, design to differentiate his products. There are substitutes in the market but they are not perfect substitutes. Firms have some control over prices, but the demand curve remains downward sloping and elastic. The producer aims at maximizing his profits by charging as much as he can over and above the output where his marginal revenue and costs equal, without compromising his sales. In the long run, however, new entries will shift the demand curve and the cost curve, thereby squeezing the profits. Oligopoly Chapter 19 narrates the story of hungry Americans seizing California from the Mexicans who inhabited the land and stealing and claiming land, building houses, planting crops and finally possessing and owning the land. Soon the croppers became shop owners, selling their crops and earning profits. Money became the common language and medium and the love for their land was lost. The bad shopkeepers soon lost their land to good ones, farms grew bigger and the owners fewer. The owners grew larger and they had others working for him. The owners were so few that they could dictate the price of labor and the workers often found themselves at the end of the day owing money to the company. In an oligopolistic market, there are a small number of large rival producers. These producers dominate the market and there is intense competition among these top players. The barriers to entry in this market is higher than the previous two markets. As in the case of monopolistic competition, firms sell similar products which are close substitutes and hence they are price sensitive. Another important feature of an oligopolistic market is the interdependency between the competing suppliers. This means that if one firm changes its prices, this will affect the sales of all other firms in the market. There are four major theories that centre on oligopoly pricing: 1) Collusive pricing where the firms collaborate to restrict supply and benefit from monopolistic pricing. Here, the firms, instead of competing with each other, enter into pricing agreements with each other. 2) Firms compete on price much like a competitive market. Producers compete using pricing as well as non-pricing methods for differentiating their products. Each firm produces branded products and involves in various methods such as discounting (price competition) and advertising, offering warranties, home delivery, innovative technology and so on (non-pricing competition). The strong interdependency among firms is illustrated through a kinked demand curve model. The firm's demand curve tends to be elastic above equilibrium price as price increases are not followed by competitors while demand turns inelastic when the firm decreases prices. 3) When one firm assumes a dominant position in the market and sets prices which are followed by the other firms, there is price leadership. Monopoly The initial chapters of the book narrates how depression sets into farmland and the farmers are driven from their land by banks and large corporate. These farmers are evacuated from their own homes and driven to starvation. The story unfolds how the owners, deep in debts with banks, approach the farmers to inform them of their fate. They explain how the land has not yielded the desired output and the banks, intent on their profits and interests, claim the land from the owners unable to pay off their debts. Machines replace farmers with efficiency and the land is driven to its maximum capacity before being sold to other settlers. The banks here take over the small farms intent on creating lesser, but larger, farms. Monopoly is a market condition in which there is only one seller and no competition existing in the market. In such a scenario, the firm becomes the industry. There will be no close substitutes for the product. Monopoly does not imply that there is a single producer; there may be many producers supplying products to the single seller. The sellers benefit as they have no competition and the customer has no alternative but to buy the product at the offered price. In a monopoly, there are high barriers to entry such as economies of scale and legal barriers. In some cases, government legislations in the interest of the public prevent other players from entering the industry. These barriers prevent entry of competition thereby giving control of the market to a single producer. The single producer has the power over the market and hence becomes the "price maker". Here the quantity determines the price; the demand curve is downward sloping. Monopolists are price makers but they are still subject to the law of demand. That is, when prices increase, output will fall. It can be seen that there is a level of production that maximizes the profit per unit of a firm. To maximize profit, firms must produce the level of output at which marginal revenue equals marginal cost. Beyond this, as production rises, costs rise as well. In this case, the monopolist will make less and less profit. From the graph below it can be seen that, for a monopoly to earn profit, P > ATC. In a monopoly, the quantity produced is often less than the socially desirable level of production. This leads to misappropriation and under utilization of resources, in turn leading to economic inefficiency. Monopoly leads to exploitation of the consumers with high prices and less choices. Monoposony In chapter 16 of the book we see the Joads confronted by a ragged man on his journey back, defeated, from California. The Joads and hoards of families driven away from their land are moving towards California in the hope of finding jobs and earning their living. They have expectations of high wages and better living conditions there. But through the ragged man we get an insight into what is really happening in this city. Pa indicates a clipping from one of the newspapers about a land owner who needs 800 men for work. The man explains how the system worked in California. The owner of the land prints 5000 advertisements of his need for 800 men. He assumes that out of the ten to twenty thousand men who see them; a few thousands would come looking for the job. As he gets more and more people to work for him, he pays them lesser and lesser. Laborers are in dire need of work and they agree to work for him for the low wages. He takes advantage of the living conditions of these workers and exploits them. Monopsony is a market condition in which one major buyer dominates and controls the market. It is referred to as the 'buyer's monopoly'. A characteristic of monopsony is the power that the buyer has over the market. There will be many sellers/ producers in the market and a single large buyer. The buyer is large enough to dictate the price at which the products will be traded and the sellers are left no choice but to agree to their terms. In a competitive market, when an employer cuts wages, laborers leave the company as they can find work elsewhere. But when there is only a single employer in the market, he becomes powerful enough to dictate the terms of the laborer's wages. Monopsony will produce where the marginal revenue cost is equal to the demand curve and determine the wage by going down the supply line. The difference between this wage and the wage in a competitive market is the level of 'exploitation'. Works Cited Page Business Book Mall - Learning Centre and Free Internet Library. November 15, 2007. Ecoteacher. Introduction to Markets. November 15, 2007. Maddala, G.S and Miller, Ellen. "Microeconomics - Theory and Applications." Tata McGraw Hill. 2004. Manning, Alan. "Monopsony in Motion: Imperfect Competition in Labor Markets." Princeton University Press. 2003. Monopsony. Wikipedia, The Free Encyclopedia. November 15, 2007. Steinbeck, John. "The Grapes of Wrath." Copyright 1939. Veblen, Thorstein. Monopoly & Monopsony: Two sides of a coin. Read More