ECON101 Principles of Microeconomics and Market Structure

Introduction

In terms of economics, market structure points towards the nature and the level of competition in the market for the various goods and services. The structure in a particular market is determined basis the kind of competition that prevails . Before understanding about the various market structures, it is very important to understand the meaning of market. A designated area where the goods and services are exchanged in lieu of money is termed as a market.

The structure that prevails in a market is determined by various factors such as the number of buyers and sellers present in that market for a particular product or service, the nature of the good or the service, what are the entry and the exit conditions and barriers and what are the economies of scale. Four types of market structure exist- Perfect competition, monopolistic competition, oligopoly and monopoly (Flynn 2015). The report discusses about these structures, detailing about how the entry barriers in a market will affect the profitability of a firm, what is the government’s role for each market and what impact does it have on the various firms, what is the impact of international trade and how does the change in the price impacts each market structure.

Perfect Competition

As the name suggests, a market structure where the competition is perfect and a single price prevails is defined as perfect competition. Here the number of sellers as well as the buyers are many and they all offer homogenous goods. Since the people competing with each other are many therefore the prices of the goods are generally low and the firms tend to earn only normal profits (Harford, 2008). Due to the structure of this market, it is very easy for any seller or buyer to become a part of the market structure as well as exit whenever they want to without much hassle.

Perfect competition does not offer any kind of barrier for the entry of the sellers. Since the profits made by the firms are normal and any firm can enter the said market structure, thus if there is a supernormal profit at any given point of time earned by any firm, then newer sellers will automatically get attracted leading the super normal profits turn down to only normal profit. However existence of a perfect competition market is a rarity but industries which are very close to the same are forex markets and the internet related industries. The price of the product depends upon the demand of the same. Thus the government does not interfere in this kind of a market structure as the forces of demand and supply play a vital role in controlling the said market structure. For example the fish market is a nearby example of a perfect competition market structure wherein there are many sellers selling various variety of fish and there are many buyers interested in buying the product. Further both the buyers and the sellers are aware and have perfect knowledge about the kind of fish being sold and what price should be charged for the same. Therefore the price is determined of each type of the fish basis the demand and supply forces (accountlearning.com. 2015). Thus in this kind of a market structure, increasing the price of a product is difficult.

Diagram of Perfect Competition

The said diagram is illustrated as under:

1. Allocative Efficient : P=MC
2. Productive Efficient: The firms who are a part of this market structure produce goods at the lowest point on the curve AC thus ensuring that production of goods are done without any wastage.
3. X Efficient: Competition amongst the firms will act as a stimulant to increase efficiency.  
4. The firms will not prefer to waste money and time on advertising their products since all the firms who are a part of the said structure are offering the same product.
5. The buyers are procuring goods at the best possible price since the firms are earning normal profits.

However perfect competition is only a myth if looked from a long term perspective. The firms will never be satisfied only by normal profits, they would always want to rise above the normal average level thus defeating the productive and allocative efficiency. The said market structure helps to provide a benchmark for comparing the problems that occur from these real world problems.

Monopolistic Competition

Monopolistic competition is such a market structure where there are various competitors in a market but each one is selling a different product. Specifically firms of relatively smaller size are a part of this market structure. Restaurant business is an ideal example of this kind of a market structure wherein each firm is offering a different kind of a dish with their own uniqueness imbibed in it but ultimately they are all trying to attract the same number of consumers. Thus even if the participants are highly knowledgeable yet the same cannot be called perfect (Anderton, 1995).  Unlike the perfect competition firms, the entrepreneurs of the monopolistic competition market have a major part to play due to the increased amount of risks associated with the various decisions made by them.

The monopolistic competition market structure does not have any kind of a limit to the number of firms and entrepreneurs to enter or exit the structure. However, in this market structure, the main highlight is the differentiation in the goods offered. There is a differentiation of the goods look wise, the marketing techniques adapted by the firms, the skill set employed by the firms are different to each other and ultimately the distribution channel is different which can be through a retail outlet or online shopping centres etc.

The demand curve is downward sloping simply because the firms are the price determiners and the industry as a whole just helps to guide them to set the price. In the near term, the monopolistic competition maximises the profit at MC=MR. However as the new firms enter the market the demand for the products produced by the existing firms become more elastic thus shifting the demand curve towards the left and wearing down the super normal profits. The firms in the said market structure is allocatively and productively inefficient in the long as well as the short run.

The striking feature of this market structure is that the government interference is welcomed by the existing firms so as to ensure that the new entrants are deterred from entering the competition. The economists support deregulation as this ensures that the price of the goods are low. There intervention will tend to make the firms incur losses since there are no hindrances to the entry (Shane. 2014).

Monopolistic Competition: Low Barriers to Entry

As per the diagram it is understood that here the prices will be on the higher side and the output will be on the lower side.

Oligopoly

A market structure wherein the number of firms are few are termed as oligopoly. Thus there is concentration in the market amongst a few firms. The said market structure resemble monopoly in many places but differentiate only with regards the number of firms which are a part of the market structure. Although the number of firms who can be a part of oligopoly is not defined specifically but it should be limited to such that a single firm has the capability to influence the other firms majorly. The wireless service industry of Canada is a perfect example of oligopoly. The three companies named Rogers Communication Inc, BCE Inc and Telus Corp have a control over 90% of the total market share. These companies are impossible to differentiate and have the ability to set the prices as well. Thus in an oligopoly market structure the firms have the ability to set the prices of the goods. They are the price makers and not the takers (econ.ohio-state.edu. 2013). Therefore they have the option to increase their profit margins as well.

The entry is highly difficult in such a market structure. For example the wireless carriers wherein they have brands with which people associate them and thus even if there is something negative against the said brand even then people prefer them over and above the new ones. Government has a very major role to play in this kind of a market as it enables collusion not to happen amongst the firms. The airline industry is a very important example of government regulation since this industry belongs to the oligopoly market structure. The government interfered in this industry as it had a notion that in order to prevent the firms from charging such high fares from the customers, there intervention was a must. It ensured that competition occurs in an oligopoly as well and ensure that excess deregulation does not happen as in case of airline industry, Thus there intervention is a necessity in order to maintain competition in the oligopoly market but excessive regulation would lead to boiling of the competition which is harmful for the economy of the particular country.

It is very important how oligopoly affects the international trade since the firms in this market structure is generally bigger in size. However it has a very small part to play in international trade. Oligopolies are welcomed by outside countries but only to the extent that it does not impact their domestic market. The government thus welcome the international firms but at the same time have a moral duty to secure the domestic economy as well.

Monopoly

The last market structure which is discussed in this paper is monopolistic market structure where there is just one seller of a particular product and there are no substitutes or competitors available in the market for the particular good or service. Such kind of a market structure have the ability to maintain super normal profits in the long run as well. They benefit in the international market as well such as Microsoft who has monopoly in the domestic market and then gradually became a part of the international market as well thus enabling the country to earn export revenues as well. This kind of a market structure helps to generate higher technological progression.

However it is not surprising if the monopoly market structure does not have a supply curve simply because they are price makers and not takers. Here since it is impractical to decide for the monopolistic firm how much to produce for supplying as it is impossible to bifurcate from the demand curve of a monopolistic.

The monopoly market structure does not allow any other firm to enter the market thus portraying a very high entry barrier. Here the firm and the industry both are same. In a monopoly the firm can easily change the price and the volume of the good it supplies at its own will (Shum, 2012). If the market is elastic then the firm will sell more quantity at a reduced price and vice versa.

Monopoly market structure calls for a high level of government intervention simply to protect the consumers from being exploited by the firm. Since the monopolies are price makers they can always set very high prices (Guru 1997). Therefore government regulates the monopolies by put price capping , yardstick competition and curbing on the monopoly power growth (Manier, 2010).
The diagram above shows the graph of a monopolist.

Recommendation

On analysing the four kinds of market structures, it is very evident that a seller and a buyer would have different preferences with regards choosing which one to opt for. According to me, being a part of the oligopolistic market structure would be more beneficial from a sellers point of view simply because they have very less intervention of government, the number of competitors are also few although the entry is difficult. The profit is also more in this market structure. Creating a monopoly is a difficult task hence becoming a seller in that market structure is difficult. Secondly in a monopolistic competition although entry is easy but the profits are low. Lastly had there been a perfect competition in reality then being a part of such a market structure would have been preferable but the same is a rarity.

Furthermore from a buyer’s point of view, a monopolistic competition market is preferable since the prices are under control and we get differentiated products. A variety of the same kind is available in this market which otherwise is missing in the other market structures. Although the price may be a little high but ultimately in order to cope up with the rising competition, the sellers tend to reduce the same.

Conclusion

Thus on summarising the various market structures, it is very evident that each structure has its own benefits and disadvantages which has to be dealt with. Perfect competition is not found in reality, but the other three are very much present in the various countries. Oligopoly and the monopolistic competition market structure are the ones found the most. Sellers will have to analyse each market structure before entering into the market so that they can earn minimum profits at least.

References

Anderton, A. (1995). Economics- Third Edition. Pearson Education: India

accountlearning.com. (2015). Features of Perfect Competition in Economics. Retrieved from https://accountlearning.com/features-perfect-competition-economics/

Manier, D. (2010). Monopoly and Competition : Government Intervention and its effects on the Free Market. Retrieved from https://damienmanier.com/2010-03-29/monopoly_and_competition/

econ.ohio-state.edu. (2013). Oligopoly. Retrieved from https://www.econ.ohio-state.edu/jpeck/H200/EconH200L13.pdf

Fischer, C.C.(1997). What Can Economics Learn From Marketing’s Market Structure Analysis ?. Journal of Managerial Issues

Flynn, S.M. (2015). Eyeing the Four Basic Market Structures. Retrieved from https://www.dummies.com/business/marketing/eyeing-the-four-basic-market-structures/

Guru, S. (1997). Absence of Supply Curve under Monopoly. Retrieved from https://www.yourarticlelibrary.com/economics/supply-curve/absence-of-supply-curve-under-monopoly/37197/

Harford, T. (2008). Perfect Competition, Monopoly and Monopolistic Competition. Retrieved from https://www.econ.jku.at/members/WinterEbmer/files/Teaching/managerial/lecture4.pdf

Shane, S. (2014). The Government Cant Make Most Small Business Markets More Efficient. Retrieved from https://smallbiztrends.com/2014/12/government-cant-make-small-business-markets-efficient.html

Shum, M. (2012). Market Structure 1 (Perfect Competition and Monopoly). Retrieved from https://people.hss.caltech.edu/~mshum/ec105/matt2.pdf