Economic for Business: Market Structures

Monopoly:

In monopoly market structure, there is only 1 seller and also no substitute for the product it produces and there are barriers for entry also. Australia post services are example of this. Sometimes government takes the control of some commodity so as to provide exploitation by private players such as fulfilling transportation needs, energy needs and this give rise to monopoly market structures. Monopoly firms represent the demand curve of the entire industry since they are only producer. Also, monopoly earns abnormal profits in both short-term as well as in long term. It is because of this fact that monopoly generally produces lower levels of output and earns higher profits when compared with perfect competition. Monopoly can go out of business only if due to some reasons; huge increase in fixed costs reduces the abnormal profits of monopoly (Obeme, & Soetan, 2015).

Oligopoly:

 In oligopoly market structure, there are few number of sellers that dominates the whole market share. There are government regulations and entry and exit restriction that restricts the number of sellers. Sometimes, huge capital investment also acts as a barrier for example automobile and airline industry. Also, products are standardized but slightly differentiated (Lavoie, 2016). Example includes that Woolworths and coles group are 2 supermarkets retailers with more than 90% of the market share in Australia. Also, there are few banks, few telecommunications firms, News media firms, 2 firms that deal in Airlines (Tyers, 2015). All of them are example of oligopoly. If there are only 2 sellers in oligopoly, it will be called as Duopoly to be more specific. Retail industry and Airline industry are example of Duopoly. There are mainly 2 types of collusion in which organizations enter and they are cartels and price leadership (Clark, & Houde, 2013). Both the collusions are actually not legal in most of the countries and thus organizations enter in such collusions by way of mere understanding or secret agreements, collaborations or relations.

The other and more popular way is to form a cartel in which all the members will sell the products at a same price (Fudenberg, & Tirole, 2013). All the firms agree not to sell at the price lower than the agreed price however they are no restriction on slight differentiation of the products and the aggressive selling activities of any members. The drawback in this approach is that some sellers offers secret discounts to buyers to make them loyal. Also, the company with better processes and lower costs often press members for a lower price and it is possible that profit margins will decrease for some of the sellers (Fudenberg, & Tirole, 2013).

Monopolistic competition:

In monopolistic competition market structure, there are large number of buyers and sellers in the market and there are no restrictions on the entry and exit criteria. Also, Products of different firms are slightly differentiated from each other and can be easily substituted. In such case, firms have slight control over the prices as their products are slightly different. Also, each firm in monopolistic competition strives for maximization of profit. Example includes taxi services, hairdressers. When compared with perfect competition, they produce lower output at higher prices. They earn normal profits only in short terms as well as long term. As per the popular Chamberlin model, 2 additional factors, which are slight unique proposition of the product and marketing and selling activities of the firm, also influence the demand (Kirzner, 2015). Thus demand curve here is a function of how aggressive is firm’s strategy in selling its products, change in pricing and selling activity of the competitors and change in tastes and income of the consumers. Although the firm is not a complete price taker, it has some influence over the price based on its product differentiation. If firm increases its price, it may lose some customers but maintain loyal customers. At the same time, if firm reduces its price, it will attract some new customers. It has negatively slope demand curve. Also, due to presence of large number of sellers in monopolistic competition, demand is highly elastic (Balisteri, & Rutherford, 2013).

Conclusion

Different market structures have been discussed in a detailed way so as to differentiate them in terms of buyers and sellers in each market structure, entry restrictions, and product differentiations along with large number of examples for each market structure. All these market structures exist because of the nature of the products. For instance, some of the products like transportation are generally overtaken by the government and becomes a monopoly so as to protect consumers from exploitation. Similarly, all the market structures have their own pros and cons. From a customer point of view, perfect competition is best where individual seller is incapable of determining price and which involves huge sellers.

References

Balistreri, E. J., & Rutherford, T. F. (2013). Computing general equilibrium theories of monopolistic competition and heterogeneous firms. Handbook of Computable General Equilibrium Modeling, 1, 1513-1570.

Clark, R., & Houde, J. F. (2013). Collusion with asymmetric retailers: Evidence from a gasoline price-fixing case. American Economic Journal: Microeconomics, 5(3), 97-123.

Fudenberg, D., & Tirole, J. (2013). Dynamic models of oligopoly. Taylor & Francis.

Kirzner, I. M. (2015). Competition and entrepreneurship. University of Chicago press.

Lavoie, M. (2016). Frederic Lee and Post-Keynesian Pricing Theory. Review of Political Economy, 28(2), 169-186.

Obembe, O. B., & Soetan, R. O. (2015). Competition, corporate governance and corporate performance: Substitutes or complements? Empirical evidence from Nigeria. African Journal of Economic and Management Studies, 6(3), 251-271.

Tyers, R. (2015). Service Oligopolies and Australia's Economy‐Wide Performance. Australian Economic Review, 48(4), 333-356.