The economy for a long time has always been described based on the market structures. There various market structures and substructures that are commonly discussed today; however, there are four main types renowned across the globe – perfect competition, monopolistic competition, oligopoly, and monopoly. Each and every of the market structures stated has their own unique characteristics and assumptions. They actually affect every decision made by various firms across the globe. They also determine the profits these firms can make. This is because of the fact that these firms depending on the market structure find competition on different levels. The firms are forced to follow the market structure less they fail.
One firm may find a market where competition is stiff while another could be in a market where everything ran smoothly. Based on these competitions, the entry into such markets can either be easy or difficult. The market structures aforementioned - perfect competition, monopolistic competition, oligopoly, and monopoly – determines the classification of market-based on the competition level. Competition, on the other hand, of a market is dependent on the number of dealers looking for a demand of customers. It also depends, as previously noted, the easiness to join a market as well as an exit in the long run. In essence, it is important for all the organizations and business to realize that these market structures actually exist in reality. As much as some researchers have continually indicated that some of the market structures are theoretically constructed and do not exist, it has been noted that these market structures actually influence business in one way or the other. Most business personnel indicate that these market structures are important for every firm especially when it comes to decision making about competition. This paper seeks to describe these market structures in details, taking into consideration characteristics, entry barriers, competitive pressures, price elasticity, government role in the market structures, and the effect on the international trade.
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Perfect Competition
According to Azevedo and Gottlieb (2017), perfect competition is a market structure where there exist many sellers and buyers as well. This market structure, according to the duo, produces a homogeneous product. Atkinson and Stiglitz (2015) adds that in perfect competition market, there is free entry and exit out of the industry. Essentially, Azevedo and Gottlieb (2017) insights that perfect competition market is where there is a large number of small firms who are freely competing against one another. Atkinson and Stiglitz (2015) say that in this type of market structure, there is no single frim which have significant market power over the others. As a result, the industry produces a socially optimal level output given that none of them have no power in controlling the prices. This is what Azevedo and Gottlieb (2017) r efer to homogeneity.
Another characteristic of the market structure is that there is ease in moving in and out of the market. Also, the demand curve for the products produced by a perfectly competitive business unit is perfectly elastic at the profitable market price. this makes it easy for a firm to exit efficiently. Azevedo and Gottlieb (2017) say that because of the market structure, any firm has the ability to sell all of its output, those that it intends to sell, at the profitable market price because the business is a small part of a large market. The firms are forced to conform to the prices set – firms are just price takers and as such, they have no right nor freedom to charge higher or lower prices. These firms have just normal revenue in a perfectly competitive market, especially the margin value.
Looking at other characteristics, perfectly competitive is one of the few market structures where governments have no restrictions, rules, and stricter regulations. Azevedo and Gottlieb (2017) say that government considers small firms as owned by its citizens and as such, there is no need for stricter rules. Also, most of the firms are small and as such their revenues are small. Because of this, there is equally no startup cost as compared to other markets, as will be discussed later. Finally, the aspects of production in the perfectly competitive market become variables in the long run.
The following graph shows the demand curve in the perfectly competitive market structure.
International trade can have an effect on this type of market. As have been described, the perfectly competitive market lacks hefty costs, including the startup and transaction costs. Azevedo and Gottlieb (2017) say that as a result, the international producers therefore competitively work to reduce the prices to have an effect on the international prices – equal prices.
It will not be fair to not conclude by clearly indicating the assumptions that are present in a perfectly competitive market: all firms in the market maximize profit: there free and easy entry and exit out of the market: all firms sell homogenous products: as such the customers are not provided with alternatives and therefore their preferences are not considered. Atkinson and Stiglitz (2015) argue that with such characteristics and assumptions, it is very difficult to find a perfectly competitive market in the real world. Atkinson and Stiglitz (2015) indicate that it is hard to find perfect competition market structure because, in theory, it is the only type of market that can result in socially optimal levels of output. Azevedo and Gottlieb (2017) say that the most probable market that has the characteristics of perfect competition is the Stock exchange market.
Monopolistic Competition
Monopolistic competition market structure is a common type that is recognized by many researchers. Nikaido (2015) explains that monopolistic competitive market is the type where there are many sellers, just like in the perfectively competitive market, however, these sellers tend to offer differentiated products. Essentially, Nikaido (2015) means that in monopolistic competition there are many small firms which compete in the market who sell similar products though slightly differentiated. This allows such firms to have a certain degree of power in the market and as such are able to control their own prices – higher or lower prices. However, these prices lie within a specific range. Atkinson and Stiglitz (2015) explain that the differentiated products and services offered by the sellers sometimes have real or just imagined characteristics, benefits, quality, quantity or features as compared to other products and services that are offered in the market. Essentially, what Nikaido (2015) means is that in the monopolistic competition market structure there are many firms but the products being sold are different – only to a certain extent. As such the firms are able to control the prices of their product because they have some form of authority, though very little.
In the long run in the monopolistic competition, the demand elasticity becomes very high as compared to the perfect competition market structure. Because of this type of demand, a negatively sloping demand curve and to some extent elastic, the firms in the monopolistic competitive market are somehow able to produce different types of product. However, Nikaido (2015) says that there is a danger with such kind of market structure in that the competition levels rise in scenarios where there are firms that produce close or very close substitutes products. Some firms are able to make high profits in the short run. Nikaido (2015) says that firms that make high amounts of revenue in the short run will ultimately even in the long run. It is important to note that in the form of market structure firms would need some form of startup costs. Also, the government sometimes have some form of regulations that are followed by the firms. In most cases, the regulations and laws that are enforced by the government are those that relate to price range. As much as the firms are able to determine their own pricing, the range is not that much. Nonetheless, their marginal revenue is not as normal as in the perfect competition market. International trade does not have much effect on this type of market. To some extent the international producers competitively work to produce products with better quality, quantity among other factors that influence the customer’s preference. The customers are given alternatives.
The Graph below shows the demand curve in the monopolistic competition market structure
Just like in the perfect competition market, monopolistic competition also builds on specific assumptions. Some of the assumptions that build the market structure include;
Firms maximize profits (similar to the perfect competition market structure)
There are free entry and exit to the market
Firms sell similar products, though differentiated based on the perceptions and demand
Consumers may prefer product based on this or her preference over another
Nikaido (2015) claim that these assumptions are to some extent realistic as compared to the perfect competition market. He says that normally consumers prefer a variety of a similar product and that it is very easy to find firms that sell similar products though differentiated. According to Nikaido (2015) however, this market structure does not favor socially optimal level of output like the perfect competition market structure since the firms have some power in controlling the prices.
Atkinson and Stiglitz (2015) say that an example of monopolistic competition market is the cereal market. In the United states, for instance, there are various brands of cereals – Cap’n Crunch, Apple Jacks, Lucky Charms among many others. Also, the soda drinks have various brands – coca cola, Pepsi among many others. These products might probably different in taste but in the end, they are cereals and sodas.
Oligopoly Market Structure
Yang, Ng, and Ni (2017) explains that it is important to note that oligopoly market structure is a common type. According to Yang et al. (2017), Oligopoly market contributes to about half of the productivity in the world economy today. These types of markets are very unique and as such easy to be noticed. In fact, Yang et al. (2017) say that oligopoly is practiced in every country and internationally. Yang et al. (2017) say that oligopoly market is composed of few firms and are very competitive with each other. Azevedo and Gottlieb (2017) clearly explain that oligopoly market is one which is only dominated by a small number of firms. The competition in such situations are limited ( Amacher & Pate, 2013). Atkinson and Stiglitz (2015) say that in such markets the firms can either compete against each other or choose to collaborate. Normally these firms collaborate to have collective market power. By so doing they are able to drive the prices at will and increase their profits.
According to Yang et al. (2017), there are various known brands that operate within oligopoly market or are oligopolistic in nature. Some of the known brands are majorly in the technological world. For instance, in the phone business, there are Samsung, Apple Inc., among many others. In the field of automobiles there exist Ford, Toyota, General Motors Corporation, among many others. In the airline business, there are Virgin Atlantic, British Airways, Singapore Airlines, Kenya Airways among many others. Even in the gaming console business, there are very few firms across the globe. Some of the few firms include Nintendo, Microsoft, and Sony. Because of being few, these firms have the market power.
The Oligopoly demand curve has two different segments. According to Feng, Li, and Li (2014), the two segments are; elastic segment which characterized by the price increase and less elastic segment characterized by price decrease. This means different elasticities that tend to come together and create a corner – commonly known as a kink. This demand curve (kinked-demand curve) helps in describing the price rigidity in the oligopolistic market structure. Feng et al. (2014) say that governments normally have a higher interest in such kinds of market structure. In fact, the government plays an important role in ensuring that these firms do not exploit the customers. In many occasions, governments formulate stiff rules in order to protect the citizens. Additionally, the startup costs for such companies are very high compared to monopolistic and perfect competition market structures.
The following graph shows the demand curve in oligopoly market structure
The oligopoly market structure is built on various assumptions just like in the perfect and monopolistic competition market structure. The five mains assumptions that build up the market structure include; all firms maximize profits; oligopoly firms set the prices; there are barriers to entry and exit of the market; products produced by the firms can be homogenous or differentiated, and there are only a few firms that can dominate in the market.
Monopoly Market Structure
According to Atkinson and Stiglitz (2015), Monopoly market structure is one of the rarest among the other types of market structure. Atkinson and Stiglitz (2015) say that monopoly market structure is the type where there exists only one seller of a product and there are no close substitutes. According to Atkinson and Stiglitz (2015), in the monopoly market structure, there is normally aa singe product and as such competition is very strict, almost non-existent. In essence, according to Atkinson and Stiglitz (2015), monopoly refers to a market structure where there is a single firm that has power over an entire market; that is, it controls the market. Su7ch firms have very high market power. This is contributed by the fact that the consumers are not provided with alternatives or substitute products. According to various researchers, most of the monopoly firms normally reduce the production output with an aim of increasing the prices. By so doing their shift the market price hence making higher profits. The profits are mostly dependent on the highest profitable levels possible since the firms have the power to design those profits without being controlled by the government agencies.
Nikaido (2015) say that entry into the monopoly market structure in the most cases are blocked and as such entry is very difficult as compared to the other previously discussed market structures. In this type of market structure, the relationship between marginal cost and marginal revenue is important to the monopoly firms since it is important to increase the organization's revenues. As such the price elasticity of the demand curve that faces the monopoly firms is a normally a determinant if the firm's marginal revenue is positive or negative. In cases where the margin is positive the demand curve is elastic otherwise it is inelastic. Starting monopoly companies always require high cost when starting. Most of the companies in the monopoly business are owned under strict supervision by the government. Owning such companies requires a high cost of transaction fees.
Normally the society always has a negative perception about monopoly firms. Most people in the society feels like these firms normally take advantage of them. This is because this type of market structure results in lower outputs and higher prices to increase the demand and lower the supply. As such the firms reap high profits. This is very unlike the competitive markets – perfect competition, monopolistic competition, and oligopoly. Without government regulations of such firms, the common people would be really exploited. Mostly the international trade is highly affected by the monopoly firms. They determine the product destination and prices in particular markets.
The graph below shows the demand curve of mono[poly market structure.
Just like the other market structures, monopoly is also built on some basic assumptions. The four common assumptions include, monopolist firms maximize profit, monopolist sets the price, there is a barrier to entering or exiting the market, and their only one firm that dominates a particular market.
There are very few monopoly companies across the world. In nations, most of the monopoly companies are those dealing in Telecommunications are normally monopoly firms, especially in the developing nations. An example of real life monopoly company in the United States is Monsanto. Monsanto is a company that deals in the corn industry. In fact, approximately 81% of the corn harvested in the country are trademarked by them. Monsanto has a high amount of market power in the United States when it comes to corn business.
Looking at the four market structures, there would obviously some that anybody could consider being in when it comes to buying and when it comes to selling. some of the factors that come into play are barriers in the entry to the market, marginal revenues, long-run profitability, substitutes, prices among many others. Barriers to entry in the market keep potential new business from going into a market. Perfect competition as previously indicated is the easiest market to enter because of lack of restrictions. The other competitive market structures such as Monopolistic and oligopoly have moderate ease of entry into the market with oligopoly having the highest. Monopoly, on the other hand, is the most difficult to enter with strict entry rules. In the long run, in the case of monopoly and oligopoly market structures, because of the few firms, the profits will always be high. The competitive pressures in these two scenarios are low. Monopoly has the lowest competitive pressures followed by oligopoly, monopolistic, and perfectly competitive markets respectively. As such selling in the monopoly and oligopoly market structures would be beneficial because of the high profits and low competitive pressures.
Monopolist and perfect competitive firms, however, cannot escape the competitive pressures. The profits are also low because of the abundance of the products in the market. Because of the availability of the alternatives the firms are prone to charge less. Some monopolist firms charge extremely less making it difficult for the sellers. This is done for the short-run revenue to keep of contenders. Buying in such markets could be beneficial since it doesn’t favor the sellers.
In summary, there are four main types of market structure – perfect competition, monopolistic competition, oligopoly, and monopoly market structures. Perfect competition is a market structure where there is a large number of small firms which compete against each other and have similar products. The monopolistic market structure is where there is a large number of small firms which compete with one another. Unlike the perfect competition, the products in a monopolistic market structure are differentiated. Oligopoly market structure is the kind where there is a small number of firms that compete with one another. They either have homogeneous or differentiated products. Finally, Monopoly refers to the market structure where a single firm has control over the market.
References
Atkinson, A. B., & Stiglitz, J. E. (2015). Lectures on public economics . Princeton University Press.
Azevedo, E. M., & Gottlieb, D. (2017). Perfect competition in markets with adverse selection. Econometrica , 85 (1), 67-105.
Feng, Y., Li, B., & Li, B. (2014). Price competition in an oligopoly market with multiple as cloud providers. IEEE Transactions on Computers , 63 (1), 59-73.
Nikaido, H. (2015). Monopolistic Competition and Effective Demand.(PSME-6) . Princeton University Press.
Yang, L., Ng, C. T., & Ni, Y. (2017). Flexible capacity strategy in an asymmetric oligopoly market with competition and demand uncertainty. Naval Research Logistics (NRL) .
