Market structure can be defined as the characteristics and organization of a market. Market structure focuses on the elements that have an effect on the essential attributes of pricing and competition. Usually, the most significant features of a market structure involve the number of companies, companies market shares, cost nature, vertical integration of industries, product differentiation extent, customer turnover, and the industry’s customer structure. There are different market structures that businesses can function. How a firm behaves is influenced by the kind of structure it operates on. This determines the amount of profit gained or how efficient it is. The different market structures include perfect competition, monopolistic competition, oligopoly, and monopoly.
Perfect competition structure is a market based on hypothesis. Competition in this market is at its highest point. It is a type of market structure that would benefit society and consumers the most. It is characterized by perfect knowledge and minimal risks and a limited role for entrepreneurs. Monopolistic competition defines a standard market structure, and companies have a lot of competitors, however every company offer products that have slight differences. It is a characteristic of small businesses, including restaurants that compete for the same buyers with unique products. A market structure that has oligopoly as a structure is one which is dominated by a few firms. This is a characteristic of a concentrated market. A monopoly market structure is when a given market has only one supplier. For purposes of regulation, the power of monopoly is given when a firm can control at least 25% of a specific market.
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The company has an oligopoly market structure because the firms that exist within this market are few. The firm is also dependent on other firms. It takes a potential reaction when its closest rivals make a decision (Fudenberg & Tirole, 2013). Therefore, it takes into account what other companies will do in retaliation to its decisions. This concept is known as interdependence. Another reason why this firm has an oligopoly structure is because of its strategy. It cannot operate dependently and therefore, must anticipate the approach of the few companies that exist within the structure. These anticipations include any activity not related to price and an increase or reduction in price. Therefore this company has to strategize based on the anticipated reactions of other firms (Fudenberg & Tirole, 2013).
The company does not have competitive pressures because of the difficulties that exist that prevent rivals in entering the market. Some of the factors that have contributed to this are economies of scale. The market structure has the characteristics of increases in output and cost decrease. These are combined with a considerable amount of starting capital give the firm a cost advantage in manufacturing over potential entrants in the market. In order to enter the market, there is a high capital requirement (Geroski & Jacquemin, 2013). This high capital requirement reduces the competitive pressures of new entrants in the market. The company also has control over scarce natural resources. This has also increased the barriers, thus preventing new entrants into the market. Since barriers to entry prevent incumbent firms from entering the market, the long-run effect is abnormal profit for the firm. The firm also may distort prices because it has market powers (Geroski & Jacquemin, 2013).
Since competitors keep on changing the price, the demand curve in an oligopolistic market is not fixed. This trend continues even if costs decline. An oligopolistic company faces a kinked demand curve where price prevails. This is because the section above the level of the prevailing price is hugely elastic, and the section below the level of the current price is mostly inelastic. An oligopolistic company assumes that in any case, a firm reduces its price lower than the level that prevails, then competing firms will do the same. It also assumes that in any case, a firm increases its prices above the price that prevails, the competing firms will not do the same.
Government regulations are essential to the business, and in the case of this oligopolistic company, it certainly has an advantage. Rules such as workplace safety are necessary because they protect employees from harm. This has been noted that it positively encourages the company as a whole to do well. Employees work better with peace of mind knowing that they are protected. Other regulations, like the federal regulations, which involve paying taxes, affect the business positively because after paying taxes, the government is able to offer infrastructure for the company. The firm can transport goods and offer fats services with the excellent infrastructure that the government provided (Campbell, Goldfarb, & Tucker, 2015). Through the creation of patents for the firm, the government helps protect the business from incumbent competitors, thereby positively affecting the industry. The firm can make profits for a long time without feeling the pressures of competition. Another form of government regulations could involve copyright.
There other regulations that affect the pricing of a product. The government can restrict the pricing strategies of a firm. This regulation prevents a firm from trying out particular strategies of pricing, such as predatory pricing. The government does this by setting price ceilings and may include how high or how low a product can be priced. Different jurisdictions may have different prices. Therefore the firm must adopt the price of each domain depending on the laws of the given location. In the global market, it is vital to be aware of each market's regulations in order to comply as failure to do so may yield server results. Laws that control price may affect the supply and demand in the industry that is affected. If a particular area regulates its prices too high levels, it increases supply and reduces demand (Campbell, Goldfarb, & Tucker, 2015). On the other hand, if prices are regulated to a lower level, then there will be high demand and decrease in supply as the firm will be struggling to keep up with the increased demand.
References
Campbell, J., Goldfarb, A., & Tucker, C. (2015). Privacy Regulation and Market Structure. Journal of Economics & Management Strategy , 24 (1), 47-73. doi:10.1111/jems.12079
Fudenberg, D., & Tirole, J. (2013). Dynamic Models of Oligopoly . Oxfordshire, England: Taylor & Francis.
Geroski, P. G., & Jacquemin, A. (2013). Barriers to Entry and Strategic Competition . Oxfordshire, England: Taylor & Francis.
