Market Structures

Market Structures
Final Paper
ECO204 – Principles of Microeconomics
What is market structure? BusinessDictionary.com says “The interconnected characteristics of a market, such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market” . In the following paper I will discuss each of the four main market structures (perfect competition, monopolistic competition, oligopoly, monopoly), I will provide a real-life example of each, discuss high barriers, the best market types to sell and buy, elasticity of each market, how the government affects the ability to price, and finally how international trade affects the structures.The first type of market structure is perfect competition. Our book defines perfect competition as “the market structure in which there are many sellers and buyers, firms produce a homogeneous product, and there is free entry into and exit out of the industry” (Amacher and Pate, 2013). Perfect competition will never exist because it relies on six characteristic “Many sellers, many buyer, Homogenous products, free entry/exit from the market, perfect knowledge, and resources need to move freely” (Amacher and Pate, 2013). In this market type no one company can affect the prices because there are so many companies’ selling the same product and there are a large number of buyers so no one buyer can affect the prices. We know this will never happen. “But very different and centrally significant, a perfect competition is logically impossible—because the very concept embodies a contradiction” . A real-life example of a perfect competition would be an agricultural market. These markets have many people selling identical produce. The prices are normally competitive and because of the large number of buyers no one can influence the prices. The next market type is monopolistic competition. “The model of monopolistic competition describes an industry composed of a large number of sellers. Each of these sellers offers a differentiated product, which is a good or service that has real or imagined characteristics that are different from those of other goods or services” (Amacher and Pate, 2013). Entry into this structure is relatively easy and new companies can start selling similar products right away. Some companies might use marketing to try and say their product is better; however, in the end the products are all the same. “Monopolistic competition characterizes a market structure in which each firm sets its choice ignoring its indirect impact on demand although correctly anticipating the value of the market variables” . A great example of this structure is the hotel industry. There are hundreds of different hotels out there and they all have different ways of trying to get you in the door; however, in the end they are all still just a place to sleep. The third structure is oligopoly. An oligopoly is “the market structure in which a few firms compete imperfectly” (Amacher and Pate, 2013). This structure has few sellers and many buyers. Because there are such few sellers it allows those sellers to work together in conjunction to keep the prices close. “Oligopolies are regularly called upon to initiate and sustain market transformation on a global scale” . An example of an oligopoly is the wireless business. In the wireless business there are four main players AT&T, Sprint, Verizon, and T-Mobile. These four companies know what the others will do when any one of them makes a price change and they each act accordingly. Oligopolies are very similar to a monopoly structure because there are very few sellers which means they can work together to keep prices high. The fourth type of structure is a monopoly. “A Monopoly is the market structure in which there is a single seller of a product that has no close substitutes” (Amacher and Pate, 2013). Since there is only one seller, that seller becomes the market because there is no competition. In the U.S. monopolies are hard to find because there are a lot of laws that outlaw this type of structure because of the negative effect it can have on the economy. The U.S. postal service is a government protected monopoly. The postal service is notorious for losing money at a very fast pace and this makes me wonder why there is not more competition to it. The postal service sets the lowest prices that even its competition can charge which makes entry difficult.In a perfect competition there are really no barriers to entry or exit because there is free entry in and out of this structure type. Because of the easy entry and exit there are a lot of sellers which in turn means there is no real profits being made. With no profits being made a business will never survive and that is why this structure does not exist in reality. In an oligopoly the few sellers that exist can make a lot of profits because they can collude with each other to keep prices the same so there is no real competition from each other. Oligopolies depend on entry barriers to limit entry and keep effective coordination with each other. “An oligopoly will not be able to practice effective coordination if it can’t limit entry” (Amacher and Pate, 2013). Any new company that enters can ruin the collusion the other companies already have in place and cause profits to drop. “If strong barriers to entry (including barriers created by government) exist, the possibility of coordination exists. If barriers to entry are weak, coordination is highly unlikely” (Amacher and Pate, 2013). With this structure inefficient firms will not survive because the bigger sellers will force them out, which means an entrepreneur has no real incentive to enter this market. In a monopoly market structure entry is forbidden, because there is new entry the monopoly no longer exists. Because there is only one seller profits will possible at times because if the profits are to great then it will cause other sellers to enter the market and end the monopoly. If the cost efficiency is not there the seller can raise output and lower prices to drive more income. With a monopolistic structure there are many sellers that offer different versions of the same product. Entry into this structure is fairly easy which can cause profits to rise and fall whenever new competition enters the market. In this structure small, inefficient firms wont last because the bigger companies will just raise output or marketing and just put them out of business or buy them.

The only two market structures that have high entry barriers would be oligopoly and monopoly. I would have to say that there is no real competitive pressure because in an oligopoly the few sellers use collusion to keep profits high amongst themselves and any competition would a threat to them and therefore would be handled right away. In a monopoly there is no real competitive pressure because there is no real competition otherwise it would not be a monopoly.

If I had my choice of what type of market I would prefer selling in I would choose a monopolistic market structure because entry and exit are easy, and the different businesses can offer different perks to buying their products. This differentiation of their products gives them an inelastic demand. “If the products are highly differentiated, the demand curve will be less elastic indicating that the firm can more easily raise the price without losing many customers” (Amacher and Pate, 2013). When it comes to buying products, I would prefer a prefect competition market because entry and exit is easy with no barriers. Because there is on competitive pressure prices will stay low and help me save money.

In an oligopoly the sellers all work together to keep prices the same; therefore, if one company lowers prices then all the others will follow suit and lower their prices which will make the demand curve inelastic. If they do the opposite and raise prices, then they will all raise prices and make the demand curve elastic. In a perfect competition structure companies have no influence on the market price. “Since the perfectly competitive firm is small relative to the market and its product is the same as that of other firms, this firm views itself as having no influence on market price” (Amacher and Pate, 2013). Because consumers can buy from any seller if prices change up or down it causes the demand curve to be perfectly elastic. In a monopolistic structure sellers can differentiate their products which can cause it to gain a following of consumers who prefer the brand. If the seller where to raise its prices it would not lose all its customers because of the loyalty to the brand and if it lowered prices it will gain customers, and this makes its demand curve elastic. The last structure monopoly is a price searcher. “A monopolist searches for the profit-maximizing price, not the highest price” (Amacher and Pate, 2013). If they do raise their prices it could cause competition to enter the market and shut down the monopoly; therefore, the seller is only in the business to cover its marginal cost. This make the demand curve for this structure completely elastic.

In a perfect competition the government has no real affect on the pricing because no one company or person can exert control and therefore there is no need for the government to intervene and challenge prices. In a monopolistic structure the government can affect prices by allowing companies to get patents which would stop competitors from copying the products and would allow the company to charge a higher price than its competitors. They could also put tariffs on similar products coming from outside the country. In an oligopoly the government is the price overseer and enforces the U.S. antitrust laws that make collusion illegal. “If these laws are vigorously enforced, it will make coordination more costly” (Amacher and Pate, 2013). With the increase in costs the profits would lower and that would help no one that is in this structure. In monopolies the government will actually help local monopolies thrive by putting tariffs on products that are brought into the country which in turn will stop the competition from importing to the U.S. “These tariffs or quotas serve as artificial barriers to entry for foreign firms by raising the price of foreign goods or prohibiting their sale in the United States” (Amacher and Pate, 2013). This help creates a high barrier for competition and helps the monopoly exist.

International trade affects all the market structures. In perfect competition international trade will increase competition because of how easy it is to enter this market type; however, it also gives the consumer access to more products. In a monopolistic structure international trade can cause prices to decrease because it can be cheaper for a foreign country to produce a product and therefore come to the U.S. and sell that product at a lower price. The government can enforce tariffs on these products, which will then help stabilize prices. Sometimes a products quality will increase in this market so that that company can differentiate itself from the others. If no tariffs are imposed prices can drop and benefit the consumers. In an oligopoly market prices can fall because more competition will decrease the chances of coordination which in turn will lower prices because the few companies don’t want the new competition.

In conclusion, you can see from the above information that I have learned a lot about microeconomics and the impact that market structure has on an economy. There are a lot of barriers that come with the four structures and if it was not for the government regulating some of these structures it could get very bad for the consumer.

References:

Amacher, R., & Pate, J. (2013). Microeconomics Principles and Policies [Electronic version]. Retrieved from https://content.ashford.edu/

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