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Market structures are the “organizational and other characteristics of a market” (Riley, 2012). These characteristics include: number of firms, the nature of costs, product differentiation, barriers to entry, and economic efficiency. Market structures are used to classify firms within the forever-growing market. There are four main market structures: perfect competition, monopolistic competition, monopolies, and oligopolies. All of these structures are alike and different in many ways and they all have various advantages and disadvantages.
Perfect competition occurs when there are multiple buyers and sellers that sell similar products (Heakal, 2013).
Since the market has so many firms with small portions of the market, entry is fairly easy. The most distinctive characteristic of perfect competition is that prices are determined by supply and demand. If supply for a product is high and demand is low, the price will decrease. If supply for a product is low and demand is high, the price will increase. This stops the firms from increasing prices just because they want more money.
If a firm within a perfect competition were to do this, the consumer would simply go to their competitor (within the same market) for a better price.
Over time, this would cause the greedy firm to lose customers, market shares, and ultimately profits. Perfect competition is the most ideal form of market since prices are based on supply and demand. The entire market is in sync when perfect competition is happening. The companies are told their projected amount of demand, they supply the product based on demand with a set price that allows them to receive profits.
It is also most ideal because entry to the market is easy and getting a new firm set up is fairly simple. There are some disadvantages as well though. Perfect competition means that things are going quite well, so many firms do not see a reason to innovate new products. While this may be okay at first, it is important to remember that there are undifferentiated products in this structure so the world will eventually get repetitive and boring (Pettinger). Sometimes, a bit of variety is good in terms of market structure.
Monopolistic competition is used to describe a market with many firms that all sell a slightly different product (“Monopolistic Competition”). In monopolistic competition individual firms are able to decide their price and amount of output. While this may seem like a luxury, it also means fierce competition since a competitor can lower their prices at any time. Since the price and output is so flexible, leaving and entering the market is fairly simple; there are no major barriers to get over. In a monopolistic competition the majority of the firms are focused on profits. They generally share equal power over the market so none are price takers (“Monopolistic Competition Definition”). A monopolistic competition market structure is usually desired for newer products that are unsure if they can compete. These new entrepreneurs are able to enter their products into an already fierce competition and see if they have what it takes to withstand the competition.
While a monopolistic competition may seem like a great market structure, it is not flawless. The most difficult part of monopolistic competition is just that, the competition. For many companies within this market structure, it is hard enough to break even, let alone make a decent profit with prices constantly fluctuating (Kumar). Even though profit-focused firms make the market run smoothly, it also causes an issue with excess product capacity. Since all of these firms are trying to edge in front of one another but are not operating at the lowest cost possible, excess product capacity could be a downfall of a company within this market. A monopolistic competition market is a sure way to know if you have what it takes to remain a consistent leader and if your product has what it takes to beat the competitors.
A monopoly market structure is used to describe a situation in which there is only one seller for a particular product (Heakal, 2013). That particular seller has control over the entire industry of that product. When this occurs, entry into this market is difficult due to high costs and other economic, political and social issues. Many times in a monopoly, that one particular seller has exclusive rights to the resource necessary to produce the product. This is why most monopolies tend to occur when a company is able to get a patent on a method or product. Once the patent is established, it is nearly impossible for others to enter to the same market. Naturally, having a monopoly over a certain sector of the market is always desirable. If ran properly, a monopoly can take over an even broader industry by having no competition and continuously making new and better products to create more monopolies.
Unfortunately, this is not always the case and a monopoly can become quite inefficient (“Monopoly Efficiency”). Much like perfect competition, people with monopolies often times get lazy. They feel as if they already have the industry under control so innovation is not necessary. To try to appear innovative, many companies begin slightly changing their product, but sometimes it ends up being a cheap product. Over time, consumers stop buying and companies are struggling to break even. To do so, they increase prices to an unjustifiable level and lose their entire customer base. Overall, a monopoly can either be a blessing or a curse depending on how efficiently it is ran.
An oligopoly market structure is described as a market with very few firms within the industry. (Heakal, 2013) It is very similar to a monopoly, just with a handful of sellers rather than one ultimate seller. Market access is limited in an oligopoly as well. All of the firms within the oligopoly are interdependent on one another. Products are all very similar, so if one company is able to lower their prices, it will get a larger market share and push the others out. At that point, the oligopoly becomes a monopoly. For entrepreneurs with a good knowledge of the market, an oligopoly can be an ideal market structure. Since oligopolies are interdependent on one another strategy is a crucial part of operating within an oligopoly. Interdependence requires the firms to constantly anticipate the response of the competition (“Oligopoly”). They must decide whether they want to be allies with their competitors or rivals. They must also decide whether they want to lower their prices or keep their prices constant. Unfortunately, however, it is nearly impossible for small businesses to squeeze into an oligopoly structure. Even if they manage to overcome natural barriers, they still find it difficult to establish themselves as a brand since the market is usually filled with larger firms (Sonkushre, 2012).
While it may seem at first that none of these market structures have similarities, they truly do. Monopolies and oligopolies are very similar market structures. A monopoly is a difficult market to get into with one seller selling one particular product. An oligopoly is a difficult market to get into with a handful of sellers selling one particular product with slight variations. These market structures are so similar that often times, an oligopoly will turn into a monopoly over time. A perfect competition and monopolistic competition are alarmingly similar also. Both are markets that are easy to get into that contain many firms selling similar products. The only difference that lies between the two is the nature of costs. Perfect competitions determine price based on supply and demand while monopolistic competitions determine price based on their own opinions and competitors. Though it may not appear as if these market structures are alike on the surface, they do share many similarities with one another.
Each market structure listed above has characteristics that differentiate it from the others. For instance, perfect competition and monopoly are the most different since they are polar opposites. A monopoly is a difficult market to get into with one seller selling one product. A perfect competition is an easy market to get into with multiple sellers selling multiple similar products. The one thing that is most different about these structures is the barriers to gain entry, the number of firms/sellers, the products, and the nature of costs within the business. All of these characteristics vary between individual market structures; that is what differentiates them from one another.
There are many forms of market structures for companies that cater to different needs within the market. The structure of a market can change at any moment so it is important to have knowledge of all four market structures; perfect competition, monopolistic competition, monopoly, and oligopoly. All structures are similar and different in various ways and have advantage and disadvantages. Even in perfect competition there is always the danger of a failing company. It is important for firms to know how to run efficiently in different market structures in order to succeed.
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