Market Structure Analysis: Competition, Externalities, and Government

This report provides a comprehensive analysis of various market structures, including perfect competition, monopoly, oligopoly, and monopolistic competition. It delves into the key features of each structure, such as the number of sellers, product differentiation, and barriers to entry and exit. The report examines short-run and long-run profit scenarios for each market structure, considering profit maximization where marginal revenue equals marginal cost. A significant portion of the paper is dedicated to understanding negative externalities and their impact on market outcomes, with a specific focus on the case of water scarcity in the agricultural sector in India. The report also explores how the Indian government addresses these externalities through various interventions and regulations, analyzing the solutions using economic theory and graphical representations. The report concludes by comparing resource allocation efficiency across different market structures and emphasizing the role of government in mitigating market failures caused by externalities.

Running head: MARKET STRUCTURE
MARKET STRUCTURE
Name of the student
Name of the University
Author’s Note

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Table of contents
Introduction......................................................................................................................................2
Key features of different market structure.......................................................................................2
Comparison of resource allocation in diverse market structure....................................................12
Negative externalities and case of government intervention.........................................................13
Analyzing how government addresses the negative externalities existence in the market...........14
Analyzing government solution to externality problem using economic theory...........................15
Effect of externality on market outcomes of monopoly and perfect competition.........................16
Conclusion.....................................................................................................................................17
References......................................................................................................................................19

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Introduction
The objective of this paper is to analyze on the different types of market structure and its
key features. Market structure refers to the interconnected market characteristics including
competition level, product differentiation, collusion degree between buyers and sellers and firms
entry and exit. Market structure are of various types such as monopoly, oligopoly, perfect and
monopolistic competition (Mankiw, 2014). The short run and long run profit or losses in these
four market structures are also discussed in this report. The condition for profit maximization
occurs when marginal revenue (MR) becomes equal to marginal cost (MC). Further, comparison
between different resource allocation in various market structures is also discussed in this study.
The paper also highlights on the negative externalities and its impact on different market
outcome. Negative externalities are defined as the external cost that the organization suffers
owing to the outcome of economic transactions. In addition, the case study on how the
government of the respective country addresses the existence of negative externalities is also
reflected in this paper.
Key features of different market structure
Perfect competition- This market structure is also termed as ‘pure competition’ where all
the entities are price takers and have low market share. The organization in purely competitive
market sells similar commodities and has no hurdle in entry and exit. Some key features of
perfect competition are given below:
 Huge numbers of retailers and buyers- As there are infinite number of vendors and
purchaser; no individual can influence the product price.

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 Product homogeneity- Numerous entities sells similar commodities so that the
purchaser’s do not have any product preference of any retailer over others.
 No barrier in entrance and exit of entities- Firms enter and exit the competitive market
according to the business profitability.
Real life examples- The agriculture industry is one of the closest depiction of pure
competitive market. In this marketplace, the vendors sell homogenous goods including
vegetables and fruits. The commodities prices are competitive and vendors cannot influence
the pricing. In addition, the purchasers also have their preference in choosing any seller.
Monopoly- In this type of market form, the single vendor sells unique good and new
entrant’s faces barrier in entering the market (Rios et al., 2014). The retailer does not face
competition as the products have no substitute.
The features of this type of market framework are :
 One vendor and many buyers- This is imperfect form of market structure where the
buyer’s reaction cannot affect the product price, as there is only single retailer.
 No substitute product- As the product has no substitute, the monopolist has the liberty in
changing the product price.
 Huge entry barrier of the firms- The monopolist has full control over the commodities
production and sale as the new entrant faces hurdle in entering the market.
Real life example- Computer programming organizations such as Microsoft is an example of
monopoly market form. There is only one seller and their product including Visa operating
system has no substitute in the market.

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Oligopoly- Small vendors selling similar or differentiated goods characterize this market.
However, few retailers dominate this market and have full product price control.
The characteristics of Oligopoly market form are:
 Few retailers- Few entities control the market and thus enjoy full control over product
price.
 Interdependence- The firms makes pricing strategy and business decision according to
the action taken by other rivalries. Therefore, the sellers are interdependent in respect of
policies of price and output.
 Competition- Intense competition exists among the vendors as there are few players
playing in the market. Moreover, this competition benefits the buyers as firms tries to
produce good quality products at lower price.
 Entrance and exit hurdle- Entities in this market have the ability to exit the market
according to their wish but faces barriers in entering the industry (Okuguchi, and
Szidarovszky, 2012). The barriers comes in the form of government license, scale
economies.
Real life examples- Mobile, television, music organizations are few examples of oligopoly
market. These industries face huge competition from their rivalries and hence focus on the
producing innovative goods according to the prevailing market conditions.
Monopolistic competition- In this type of market, the manufacturers sells differentiated
product and are not close substitute( Rezai, 2016). The firms have no control over the goods
price and set the price charged by competitors.
Some characteristics of monopolistic competition are:

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 Huge number of purchasers and retailers- Each entity makes the pricing strategy
independently and has control over goods price.
 No barrier in firms entrance and exit- The companies enters the market when other firms
makes supernormal profit (Dunne et al., 2013). Therefore, increase in supply reduces the
product price and hence the firms existing in the market attains normal profit.
 Goods differentiation-Companies differentiate goods in order to gain competitive
advantage.
Real life examples- Restaurant and hotels business are some industries that faces monopolistic
competition.
Short run and long run profits or losses in various market structure
Monopolistic competition- Monopolistic competitive entities in short run attains profit
or faces losses by manufacturing that amount of quantity when MR=MC. When average total
cost(ATC) becomes higher than market price, loss occurs (Matsumura and Tomaru, 2012). On
the other hand, if ATC lies below equilibrium price, profit is attained. In the long run, the
competition in the industry causes each entities to attain normal profits. Moreover, the economic
profits of the companies in long run are equal to zero.

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Figure 1: Short run profit in monopolistic competition
Source: (As created by author)

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Figure 2: Short run loss in monopolistic competition
Source: (As created by author)
Figure 3: Long run profit in monopolistic competition
Source: (as created by author)
Perfect competition- The firms in pure competitive market attains economic profit in the
short run when MR> ATC and faces loss when MR<ATC. In the long run, as firms do not face
hurdle in entrance and exit, the market supply increases (Mankiw, 2014). However, all the
entities gains normal profit, as the firms attain no incentive in entering or exiting the industry.

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Figure 4: Short run profit in perfect competition
Source: (Author’s creation)

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Figure 5: Short run loss in perfect competition
Source: (As created by author)
Figure 6: Long run profit in perfect competition
Source: (Author’s creation)

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Figure 7: Long run loss in perfect competition
Source: (As created by author)
Monopoly- Monopolist do not always gains profit as the firm produces new product
according to consumer’s preferences in the short run (AR> SATC). They also accepts loss in
short run provided the firms variable cost are covered (AR<SATC). In long run, the companies
gains supernormal profit when full utilization of plant does not occur.

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Figure 8: Short run profit in monopoly
Source: (As created by author)