The 4 Types of Market Structure
The 4 Types of Market Structure
* There is a single seller and large numbers of buyers that sell products that have no close substitutes. The entry and exit barriers are also high.
* No close substitutes – Monopolies firm would sell products in which there are no close substitutes.
* Restriction of entry of new firms.
* Advertising: Advertising in a monopoly market depends on the products sold. Advantages and disadvantages:
1. Stability of price
* In a monopoly market the prices are most of the times stable. This happens because there is only one firm involved in the market that sets the prices if and when it feels like. In other types of market structures prices are not stable and tend to be elastic as a result of the competition that exists but this isn’t the case in a monopoly market as there is little or no competition at all.
2. Source of revenue for the government
* The government gets revenue in form of taxation from monopoly firms.
3. Massive profits
* Due to the absence of competitors which leads to high number of sales monopoly firms tend to receive super profits from their operations. The massive profits realized may be used in such things as launching other products, carrying out research and development among many other things that may be beneficial to the firm. 4. Monopoly firms offer some services effectively and efficiently.
1. Exploitation of consumers
* A monopoly market is best known for consumer exploitation. There are indeed no competing products and as a result the consumer gets a raw deal in terms of quantity, quality and pricing. The firm may find it easy to produce inferior or substandard goods if it wishes because t the end of the day they know very well that the items will be purchased as there are no competing products for the already available market.
2. Dissatisfied consumers
* Consumers get a raw deal from a monopoly market because quality will be compromised. Therefore it is not a wonder to see very dissatisfied consumers who often complain about the firm’s products
3. Higher prices
* No competition in the market means absence of such things as price wars that may have benefited the consumer and as a result of this monopoly firms tend to charge higher prices on goods and services hence inconveniencing the buyer.
4. Price discrimination
* Monopoly firms are also sometimes known for practicing price discrimination where they charge different prices on the same product for different consumers.
5. Inferior goods and services
* Competition is minimal or totally absent and as such the monopoly firm may willingly produce inferior goods and services because after all they know the goods will not fail to sell.
* Having only a limited number of companies controlling a large proportion of a particular industry reduces the likelihood of one of the members making unjustified price increases. Should such an increase not be adopted by the remaining companies, the first supplier will simply lose its share of the limited market, as consumers will turn to the other providers for the identical product at the lower rate. Although the profit margin of the other companies may be slightly smaller, they will, of course, benefit from the subsequent increase in demand. Disadvantages
* In a normal market, it is supply and demand that mostly affect price. Should a consumer find a similar product offered by another provider at a cheaper price, he will make his purchase from that other provider. Suppliers will not, therefore, over-inflate their prices because they will simply lose customers. In an oligopoly, there is little choice for consumers and this will negate any influence they may have had over price control. By the very nature of an oligopoly, providers in an industry with limited members are able between them to dictate the price of their product, as consumers are unable to find alternatives or substitutes elsewhere. Since in many countries collusion or conspiracy between companies to inflate prices is illegal, members of an oligopoly may follow signals given by its industry leader as to any imminent changes it proposes to implement.
1. Resources are allocated in the most efficient way to meet market demand and maximise consumer satisfaction. This means that market mechanism works better. 2. It is the cheapest way of using the factors of production we have. Which says that we are at the lowest part of the AC curve? 3. There is no cost of advertising, selling, marketing, or motions. These are often a form of waste to society as a whole, though beneficial for individual firms. 4. Rapid change is possible to meet new consumer demands – it is very flexible. The interests of producers are the same as for consumers. 5. Freedom to choose exists.
6. It avoids all the wastes of monopoly.
7. It prevents the emergence of a few rich and powerful people .There are a lot of firms, all small, so that no major powerful personality can rise and dominate others.
1. It produces what is demanded under the given distribution of income. We can imagine a scenario with a very few rich people with pet dogs or cats which dine extremely well on chicken and the like, while the masses starve.
2. Spill overs and externalities can exist. These are costs caused to others, e.g. the disposal of nuclear waste or toxic chemicals by dumping them in streams. 3. No economies of scale possible – all the firms are too small. 4. Perfect competition is consistent with a limited choice of range of goods; monopolistic competition may have a much wider range. An example is motorcars – there are an awful lot of different models and competition is much less than perfect. 5. Little or no research and development is possible because there are no funds for it. Under perfect competition there are no surplus profits (in the long run they are whittled away!) R&D is possible under monopoly because of the surplus profits available.
1. There are no significant barriers to entry; therefore markets are relatively contestable. 2. Differentiation creates diversity, choice and utility. For example, a typical high street in any town will have a number of different restaurants from which to choose. 3. The market is more efficient than monopoly but less efficient than perfect competition – less allocatively and less productively efficient. However, they may be dynamically efficient, innovative in terms of new production processes or new products. For example, retailers often constantly have to develop new ways to attract and retain local custom. Disadvantages
Some differentiation does not create utility but generates unnecessary waste, such as excess packaging. Advertising may also be considered wasteful, though most is informative rather than persuasive. As the diagram illustrates, assuming profit maximisation, there is allocative inefficiency in both the long and short run. This is because price is above marginal cost in both cases. In the long run the firm is less allocatively inefficient, but it is still inefficient.
http://knownai.hubpages.com/hub/Advantages-And-Disadvantages-Of-A-Monopoly-Market http://www.ehow.com/info_8181651_advantages-disadvantages-oligopoly.html http://wiki.answers.com/Q/What_are_the_differences_between_perfect_competitve
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 3 October 2016
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