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Market Structure Summary There are four market structures: Pure Competing, Monopoly, Oligopoly, and Monopolistic Competition. Each one has a different structure and a different set of rules. While going over what each market is, there will also be focus on the equilibrium price, economic profit potential, equilibrium quantity, efficiency and how international trade affects each of these markets. Perfect/Pure Competition Pure/Perfect competition is a central cornerstone of paradigm neoclassical economics (Kapeller & Pühringer, 2010).
The true definition of pure/perfect is when large amounts of sellers and buyers exchange similar products with neither party having a noteworthy impact on price (Kurtz & Berston, 2015).
An example would be this would be a farmer’s market. Several stall would have the same produce with the price readily available. This price is usually comparable among the stalls, with at most only, a few pennies making a difference.
Imperfect competition provides foundations for perfect competition by making strategic behaviors more competitive (Berta, Julien, & Tricou, 2012).
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If, on the market, there is an imbalance in price competition would equalize it. This cannot happen due to all the suppliers and rationed demanders consenting to a single price (Berta, Julien, & Tricou, 2012). Perfect competition can only really work when at equilibrium. However, having imperfection helps perfect completion grow with strength (Berta, Julien, & Tricou, 2012). The price and quantity of perfect competition varies on how much product makes it through the seasons and how high the demand is (Kurtz & Berston, 2015).
Profit potential is very miniscule in perfect completion due to having no control over the price.
Although having small profit perfect competition is seen as efficient due to the ‘equality’ throughout the market (Berta, Julien, & Tricou, 2012). Monopoly A monopoly is where a business takes over the market with a particular service or good and there is no competition to be found (Kurtz & Berston, 2015). For instance, this usually refers to a utility company. On the average utility companies do not have competition. They are the only facility in town that offers that service and you have no other choice but to use them. Diamond Paradox is a well-used phrase for monopolies. This is where sellers of a particular item post the monopoly base price causing buyers to not have to look elsewhere (Menzio & Trachter, 2015).
From a business standpoint this cannot exist. This would result in a selling price that is equal to the cost of production, leaving the business with zero profit. One would think this would create a true monopoly, but if the search frictions become nothing, as competitiveness takes over the equilibrium (Menzio & Trachter, 2015). In a monopoly the company would not know the demand and would want the largest profit possible (Naimzada & Ricchiuti, 2008). The company would want to produce the quantities that would get them the most profits. This would make the economic profit potential be extremely high depending on demand for the company’s product. Production would have to modify “from one period to the next” (Naimzada & Ricchiuti, 2008). Oligopoly Oligopoly keeps out new sellers by having high startups; this means the vendors are few in the market (Kurtz & Berston, 2015). It was found that overproducing in an oligopoly was common (Zhang & Brorsen, 2011).
However, imposing bankruptcy lowers overproduction because most companies that overproduce become bankrupt (Brandts & Guillen, 2007). A prime example of this would be Chrysler who filed bankruptcy in the last few years. In the study by (Brandts & Guillen, 2007) it was found that price competioin was simular to quantity competion between companies. In the same study it was found that only the companies that occupied the highest price in the market were stable. This could lead one to the conclusion that if more companies were to join the same market more instablility and bankrupcies would occur for all companies occuping the market. A monopoly would be socially better than any oligopoly.
Profit potential could be high for some time, but in the end will plummet. This is because that on “all levels of price discrimination” (Kumar & Kutlu, 2016) loss exists. Being in an oligopoly market does not seem to be very efficient. Monopolistic Competition Monopolistic competition is a lot like pure competition except that there is some control over the prices (Kurtz & Berston, 2015). The equilibrium quantity tends to stay evenly balanced. Companies here are frequently known to be on a small scale because of the small effect they have on the demand for quantity (Sakane, 2016). Profit potential depends on how the supply and demand is going. In monopolistic competition it has been found that price will decrease if demand falls short of supply and price will increase if demand exceeds supply (Negishi, 1989). This makes sense from a consumer’s perspective.
Equilibrium prices are seen as reasonable due to what is used to make the product. An example would be a high nutritional cat food vs a generic brand with less nutrition. The generic one would be cheaper while the high nutritional one would be more expensive (Kurtz & Berston, 2015). These prices are where the phrase, “you get what you pay for” comes from; from the eye of the perspective consumer. Monopolistic competitions are efficient unless there is a demand shock (Malley & Molana, 2001). This could cause anything from loss of jobs, closing of companies to gain in profits and company expansions, depending on which way the demand shock goes. International Trade Affects International trade has a variety of effects on each market. Most economists think oligopoly and monopoly are failures in general (Lamaj, 2015).
Oligopolistic and monopolistic markets are able to change their prices based on what they are producing. Oligopoly is even able to act as if the company is a monopoly (Lamaj, 2015). This allows for them to raise their monopoly prices which is the higher of their prices. The result of these practices, were every company to participate in them, would potentially be a government intervention to reduce the market power of those companies (Lamaj, 2015). This reinforces the idea that no monopoly is sustainable over a significant amount of time. It was found in the study by (Lamaj, 2015) that the set of factors, institutions, and policies make up the amount of productivity coming from monopolistic competition and perfect competition. This sets the limit of reachability for the economy and growth rates. The more competitive our economy is the quicker we will grow. Being able to quickly grow helps the economy improve due to the amount of productivity from our country by leading to higher income and returns on investment.
Market Structure Summary: Competition Leads to Success. (2022, Apr 05). Retrieved from https://studymoose.com/market-structure-summary-competition-leads-to-success-essay
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