ECON226 - Market Structures: Assignment
Added on 2020-03-07
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Running head: MARKET STRUCTURES 1Market StructuresStudent’s nameProfessorCourseDate
MARKET STRUCTURES 2Market StructuresPerfect CompetitionLarge Number of Sellers and BuyersThe essential feature of perfect competition is that there are numerous businesses in the industry. Every firm is small and its output insignificant hence it exercises little control over the price of products in the market. The prices in this market are determined by the forces of supply and demand, and thus a firm is a price taker. Moreover, due to a large number of buyers, a single a consumer is not in a position to influence the market price[ CITATION Cas14 \l 1033 ]. The perfectly competitive market structure is hypothetical and thus difficult to find a real-world example. However, some industries like the foreign exchange markets are close to perfect competition. In foreign exchange market, there are many buyers and sellers, excellent information relating to the prices, it is easy to compare prices and that the currency is identical[ CITATION Irv16 \l 1033 ]. Homogeneous ProductThe products in a perfect market are identical and homogeneous in all aspects. The purchasers should feel that the commodities provided by different traders are the same in aspects like size, quality, and taste. As a result, the goods of various companies are perfect substitutes from the perspective of consumers, and the cross elasticity is inestimable.[ CITATION Irv16 \l 1033 ]Freedom of Entry and ExitThere are no hurdles either stopping the entry of new ventures or compelling the existing businesses to continue operating. The companies have full autonomy to choose whether to carry
MARKET STRUCTURES 3on their operations or exit the industry. The entry and exit of businesses are determined by economic considerations solely[ CITATION Arn13 \l 1033 ]. Perfect InformationBoth the buyers and sellers under perfect competitive have complete knowledge concerning the market conditions. The purchasers understand in detail about the product sold as well as the prevailing price in the industry[ CITATION Arn13 \l 1033 ]. Likewise, the traders comprehend the probable sales at different price levels in the industry. MonopolySingle Seller and Large Number of BuyersUnder a monopoly market structure, there is only one seller in the industry while the customers are numerous. A single company is the only producer of a particular product or service. This feature eliminates the difference between the industry and the firm and hence a monopolist venture is itself an industry[ CITATION Geo13 \l 1033 ]. British Telecom is an example a monopoly that owns telephone cabling in the United Kingdom. No Close SubstituteThere are no close substitutes under a monopoly market structure. As a result, a monopoly firm is in a position to alter price as it wishes. The consumers will continue to purchase the commodity even if a monopoly raises the price. Due to this reason, the cross price elasticity of demand under a monopoly is zero[ CITATION Geo13 \l 1033 ]. Substantial Hurdles to Market Entry
MARKET STRUCTURES 4Under a monopoly, the barriers to market entry are so strong that new firms cannot penetrate the market. Since a monopoly cannot exist if there is competition, the existence is based on the barriers to market entry. The source of obstacles under this type of market includes economies of scale, control of key raw material, government regulation and among others[ CITATION Gil14 \l 1033 ]. OligopolyFew FirmsAn oligopoly market structure is characterized by a few businesses in the industry. Usually, one or more companies dominate the market and actions of any of the company affect the other firms. Moreover, competition among the companies under this market structure is often intense, and every company attempts to manipulate the quantity of output or prices with theview of outsmarting each other[ CITATION Cas14 \l 1033 ]. Australian supermarket industry is an example oligopoly market structure. Two firms dominate this industry, that is, Woolworths and Coles. Barriers to Market EntryThe reason why there a few companies in the sector under oligopoly market structure is that there are barriers for the entrance of new enterprises. Some of the hurdles to market entry results from the control of essential inputs, patents, and significant initial capital requirement.[ CITATION Cas14 \l 1033 ]Only those businesses that outdo such barriers enter the market. Non-Price Competition
MARKET STRUCTURES 5Companies operating under oligopoly are in a position to sway the prices. However, in most cases, they attempt to shun price competition for fear of price war that may result in significant losses. Hence, they resort to other approaches such as better services to the clients andadvertising to increase their market share[ CITATION Sat13 \l 1033 ]. Monopolistic CompetitionLarge Number of CompaniesUnder monopolistic competition, there are relatively numerous business enterprises each satisfying a small portion of the market for a given product. Due to the existence of many companies in the industry, the competition among businesses is always stiff. Each firm operates separately and has limited control over the market price[ CITATION Fra15 \l 1033 ]. Toothpaste industry is a real-world example of a monopolistic competition market structure. Some of the companies in this industry include Colgate-Palmolive Company, GlaxoSmithKline plc, and Dabur India Limited with brands such as Colgate, Sensodyne, and Oral-B. Product DifferentiationProduct differentiation includes distinguishing commodities on the grounds of color, brand, sizes, and shape among others[ CITATION Cas14 \l 1033 ]. The products generated by monopolistic competitive firms are differentiated. Despite product differentiation, the commodities are close substitutes.Freedom of Entry and ExitUnder this market, it is easy for the businesses enterprises to enter and leave the market. When the current companies are earning supernormal profits, the new companies will enter the
MARKET STRUCTURES 6market and hence normal profits. Despite the freedom of entry, the entry may not be as easy or free as under perfect competition market[ CITATION Man14 \l 1033 ]. ProfitsPerfect CompetitionIn the Short RunUsually, companies in perfect competition make supernormal profits or losses in the shortrun. However, the firms may also generate normal profits depending on the market conditions. Graph 1: Supernormal ProfitsCost/revenueThe firm operates at point A where the MC=MR, generating a profit maximizing output Q1. At this production point, the price exceeds the cost and hence a supernormal profit. The supernormal profit made by a perfectly competitive company is shown by the area shaded green. MCD=MR=ARPQ1A0OutputACSupernormal profitC
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