Structures of Market
Although some of these market structures are simply theoretical constructs and do not indeed exist in reality, they are of great significance because they can demonstrate pertinent aspects of market rivalry. Perfect competition This is a type of market arrangement whereby several small firms are in competition with one another. A single firm in perfect competition does not have any major influence in market. Since no single firm has capability to influence prices of market, the entire industry creates the socially optimum volume of output (Baumol & Blinder, 2015). The concept of perfect competition is founded on four major assumptions namely; freedom of entering and exiting the market exists, all firms offer similar goods, customer inclinations do not exists, and all firms maximize profits.
b) There are simply small firms controlling the market. c) All firms maximize profits. d) Products may be differentiated or identical (Neary, 2016). e) Oligopolies can set prices Monopoly This is a market structure where the whole market is controlled or dictated by a single firm. In monopoly, buyers do not have any known alternatives (Robert, 2018). This slight difference gives firms in this market structure some level of market command that enables the firms to levy greater amounts within a specific radius (Baumol & Blinder, 2015). This market arrangement assumes that there is freedom entering and leaving the market, each firm maximizes profits, customers may prefer one commodity over the other, and firms sell differentiated products. Although these assumption are somewhat closer to reality that assumptions in perfect competition, monopolistic competition will no longer lead to a socially optimum degree of output (Baumol & Blinder, 2015).
This is because the firms possess higher power and can dictate market prices to a certain level. Cereals market is a good example of monopolistic competition in real world. This capability allows big companies to significantly reduce their production cost. Consequently, these firms may reduce market prices to a level that will make it hard for new entrants to operate. Hardships imposed by economies of scale would eventually cause new competitors to operate at a loss and probably close down (Neary, 2016). High entry barriers tend to promote monopolies. Entry barriers insulate firms in monopoly from competitor firms. As a result, some firms that have inefficient production systems may continue to survive. In addition, the reduced competition implies that inefficient firms do not big face threat from rival firms.
Innovative and creative firms may be discouraged from entering market by high costs imposed by high entry behaviors (Lake, 2018). IV. Incentive of entrepreneurs to develop substitutes for the product supplied by the firms Great entrance barriers cover large markets including markets where certain firms own resources without close alternatives (Robert, 2018). Nonetheless, high barriers to entry like patents and government regulations promote research and innovation (Colander, 2017). Firms that establish cost-effective production methods and enhance the quality of their products pose competition for monopolists. Similarly, in oligopoly there are high barriers to entry, as well as competitive pressure. In this market structure, price decisions made by any firm will definitely affect the profits, price, as well as the output of competitor businesses. Therefore, oligopoly experiences great competitive pressures.
How different market arrangements react to price changes of the goods or services they retail In perfect competition market, there are numerous firms or sellers in market providing a product that is standardize (Colander, 2017). In this situation, the decision of the firm in terms of the amount to produce does not really influence the market price of its output. Therefore, marginal revenue equals the value of production. It is the marginal revenue and marginal cost that ascertain if the seller should keep manufacturing at its output level or not. In order to maximize the profit, the firm should raise its output when marginal revenue is greater than marginal cost (Colander, 2017). However, once the marginal cost is greater than marginal returns, the firm lowers output and increases price.
Monopoly market structure offers a combination of inelastic and elastic goods where elastic is always higher (Colander, 2017). This is attributed to the fact that there are no substitutes in this market and firms have market power to fix prices. Nevertheless, exorbitant prices will make consumers to avoid buying the products. Monopolistic competition is characterized by many buyers and sellers, as well as high differentiation of products (Robert, 2018). However, it is assumed that price increase by one firm does not necessary lead to rivals increasing their prices but a reduction of price by one player would result in rival firms reducing their prices. The influence of government’s role in each market’s structure ability to price its product In oligopoly, firms may collude so as to increase prices and earn higher profit.
A cartel is formed when firms from same industry meet and agree to set product pricing that will lead to prices skyrocketing above competitive standards (Cowell, 2018). Some examples of cartels are bid rigging, price fixing and market division. Whereas in price fixing competitors collude to increase or sustain the price of trading their product, market division entails rivals collaborating to divide the share of market amongst them (Lake, 2018). Potential firms in this market are required by government to acquire permission in order to do business (Lake, 2018). The process can be costly and bureaucratic thus discouraging new entrants. Moreover, patents granted to existing firms restrict rivalry from new entrants. Influence of international market in each market structure Both monopoly and oligopoly markets have higher barriers of entry.
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