Saturday, January 26, 2013

Market Structure

Over the period, the practice of buying and selling has existed in the definite market places where goods and service are readily available. The practice of buying and selling leads to the satisfaction of human wants and needs. The buyers experiencing the deficit of given product or service acquires the product/service in the market to satisfy their utility. In the same regard, the sellers ensure satisfaction of their utility by acquiring money from the buyers. Over the period, different market structures have been developed because of the complexities in trading activities. The rise of each market structure in the market is attributed to the guidelines laid and observed during the conduction of services (Mankiw, 2011). The establishment of the market structures depends on the attributes of the products, product differentiation, nature of the demand curve and the freedom of entry and exit into the market.

Perfectly competitive market
          Many buyers and sellers with homogeneous products characterize this market. Over the period, economists devised measures of price determination by the use of demand and supply. In this regard, many market participants are attracted to the market where there are no restrictions to entry or exit of trading members. The motive of all the participants is profit. Higher profits lead to the entry of many sellers and vice Versa. The participants of the market have perfect information about the market products and firms in this category operate horizontally. This means the firms are price takers. The price of goods and services in the market are established by the interactivity of the forces of demand and supply (William Boyes, 2010). In the short run, the profit of the firm is calculated by ascertaining the value of marginal cost. Because of the dominance of some firms in this market, there is a possibility that some firms in this market are possible of earning supernormal profits.

Because of the nature of the market where there is identical products and perfect determination, the market is inhibited by many sellers and buyers. In this regard, price determination is attributed to the activity of the forces of the demand and supply. The equilibrium price is the price and sellers charging more from the market (Mankiw, 2011).

          The establishment of the market is sometimes characterized by the dominance of one seller. In an instance where one seller dominates the market by being the sole provider of goods and services then that seller qualifies to be a monopolistic seller. Monopolistic firms require the intervention of the government to control their activities because they will always set price high in order to maximize their profits (Frederic P. Miller, 2010). In monopolistic firms, prices are determined by the monopolistic firm. The managers of the firm also take the initiative of regulating output that maximizes their profits.
          Profit is maximized in monopolistic firms when marginal revenue equals marginal curve. However, the firms produce at this rate but sell expensively at average revenue. This practice enables the monopolistic firms to earn supernormal profits in the market and drive other competitors because of the imperfection of the market. Generally, monopolistic firms present the perfect case of market imperfection where determination of price is not enhanced by the market forces. Monopolistic market restricts the entry of other firms and in some instances; the entry of other firms is virtually blocked (Frederic P. Miller, 2010).

Comparison between perfectly competitive market and monopolistic market
         The establishment of both monopolistic market and perfect market enhances the aspect of utility satisfaction. It is prudent that both elements lead to the provision of goods and services. However, perfectly competitive market is more preferable than the monopolistic market. This preference is because perfectly competitive market allows the entry of various sellers and price determination is through the forces of demand and supply. Equilibrium price and quantity prevails in the market. Furthermore, the preference is also because both market participants participate in the establishment of equilibrium price and output. In a monopolistic market, there is only one firm that sets prices and output in the market (Frederic P. Miller, 2010).
          Contrary to the perfectly competitive market where price and output are determined by market operations, monopolistic firms produce lower output and sell to consumers at higher prices. In this regard, the monopolistic firms earn higher profit because they produce at reduced costs. These firms have the advantage enhanced economies of scale that translates into benefit of large scale production. Perfectly competitive market may also have supernormal profit because of dominance in the market (William Boyes, 2010). Over dominance in the market may lead the use of restriction strategies and price fixing practice where other firms are driven out of the market.
          It is notable that both market structures have minimum government intervention. The operation of the market activities are characterized by minimum government intervention that only seeks to ensure the interests of the consumer are met through the provision of standardized goods.

Monopolistic competition
         The establishment of competitive monopolistic market is based on the emergence of many monopolistic firms with differentiated products. This market is characterized by many sellers with similar products. The products in this market are similar but differentiated, and each seller commands a significant share of the market. In reality, the sellers cannot gain economic profit by charging higher prices (Frederic P. Miller, 2010). This feature differentiates competitive monopolistic market from monopolistic market where the participating firms gain economic profit by raising their prices.
          The analysis of the market structure reveals it has four distinct features that include the establishment of a large number of small firms. These small firms operate independently like monopolistic firms in the market. The products in the market are also similar but distinct, and there is considerable mobility of the factors of production that makes production in the market relatively cheaper (William Boyes, 2010). Lastly, the participants in the market have information about the commodities in the market but the information is not perfect like in the case of perfectly competitive market structure.

Product differentiation
          Product differentiation is highly beneficial in a market characterized by many competitors and participants. The aspect of product differentiation involves the distinguishing the ’s products from those of the competitors to make it more attractive to the target market (Mankiw, 2011). This theory is largely used by competitive monopolistic firms to attain increased earnings. The most convenient product differentiation used the majority of firms entail the use of advertising strategy. In addition, firms can also use physical product differentiation by changing the physical attributes of the product. These include changing the packaging and color or any other physical attributes to enhance difference with competitor products. Marketing is also an adopted by firms to this aspect. This enhances the use product packaging to entice the customers about the difference of the product from the competitors. Lastly, the firm can ensure product differentiation through the use of human capital differentiation. This aspect involves the conduction of training and enhancing skills to enable the employees produce differentiated product (Mankiw, 2011). Generally, product differentiation is extremely beneficial because it enhances production and sales by focusing on a particular segment of the market and customizing the products.

Frederic P. Miller, A. F. (2010). Monopolistic Competition. Nederland: Alphascript Publishing.
Mankiw, N. G. (2011). Principles of Microeconomics. United States: Cengage publishers
William Boyes, M. M. (2010). Economics. United Sates: Cengage publishers