Market Structure

Market Structure

Introduction

Market structure refers to the characteristics of the market for instance its organization and how those characteristics affect pricing (Riley, Para. 1-2). The market structure has many different features such as the number of firms and their market shares, the frequency of customer’s turnover, the costs of buying the products and the customers. The market structure has an effect on the prices, levels of supply, entry by other firms; including competition and the efficiency of operations. Moreover, the market structure is determined by such factors as the ease of entry or exit into the industry, the barriers that new firms may have to deal with, nature of who control the pricing of the goods or services and finally the products that the firms produce (Ibid). The paper will examine four primary market models complete with specific examples of industry that exhibit the model. Secondly, under each market structure, the characteristics of the industries in demonstrating the qualities of the respective market will be discussed.

Primary market models

The four market structures that are going to be discussed in the paper are perfect competition, monopoly, monopolistic competition and oligopoly.

Perfect competition

 Perfect market structures are very few in normal circumstances, but theoretically, it envision a market with no barriers to entry, a perfectly elastic demand curve and there are an unlimited number of buyers and sellers. In addition, the sellers produce the same type of goods thus consumer can have no preferences and the sellers are price takers (Rittenberg & Tregarthen, pp. 227; Ghai & Gupta, pp. 3-6). The market is also characterized by high level of information for the consumers so they can make the right choices. In this market, resources are allocated for the most efficient use due to the competition The prices are at a marginal since they are determined by the forces of both the supply and demand.

An example of industry exhibiting perfect competition is the agricultural sector. Here, any farmer can start to plant a crop for example tea without any barriers to the endevours. When the farmer is not satisfied with the returns they can opt out of the business again without any hurdle thus it exhibits the characteristic of “no barrier to entry or exit”. The farmers in the industry all produce a homogenous good, tea. The prices in the industry are determined by the demand and supply forces of the market. Since there are no barriers to entry or exit, there are a number of sellers in the market and no particular farmer is an industry leader but each only seeks to use the most efficient production methods to increase their profitability.

Monopoly

Rittenberg & Tregarthen (pp. 253-256) defined a monopoly as a market structure where there is only one service provider. There are very high barriers to entry in this market for instance the need for very high capital outlays and the economies of scale. The goods in the industry have no substitutes. On top of that, the firm may have technologies that are very superior to the other firms in the industry. Some firms also have monopolistic power derived from their strong control of the natural resource from which, goods are produced. Finally, the legal process can give a company monopoly for instance if the firm has exclusive knowledge in the production of the good or part of the good (patent and copyright Acts). Another characteristic of monopolistic market is that the firm is a price giver, have high market power thus determines the prices, and thus they sometimes make super profits. The monopolists can change the pricing and quality of their goods or services at will. Since there is only one firm involved in the production of the good, consumer choice is non-existent, they are forced to either use the good or service or forfeit it all together.

An example of a firm operating as a monopoly is the Long Island Power Authority (LIPA) which provides retail electricity services to the residents of Long Island. The residents of Nassau, Suffolk and Queens Counties have no consumer choice. They have to consume the power that is provided by LIPA. Although the company is non-profit making, they have exclusive power of market and the utility charges are solely determined by the firm. There have been unprecedented increases in the charges to the consumers in the recent times. Due to the high capital outlay needed to start such operations, other firms have not been able to venture into the business of provision of power in the island. The company was formed by an act (Long Island Power Act of 1985) thus its position and interests in the industry are protected by the government of New York State (Rather, Para. 7-8; 17).

Monopolistic competition

This is the market structure where there are a considerably large number of industry players characterized by each player having a small market share. The products in this kind of market structure can act as substitutes for the goods produced by other firms in the industry. The market is characterized by comparative ease of entry and exit of firms but the individual firms have some control over the prices by which they sell their goods. Since each firm has a slightly different product from the other, there exist small monopolies held by the individual firms. In addition, the industry is characterized by a large number of sellers and buyers (Ghai & Gupta, pp. 3-6)

An example of a monopolistic competition is the beer industry in the United States. According to Ludwick as cited In Rittenberg & Tregarthen (pp. 280-281) there were almost forty players in the industry providing almost the same taste of beer in United States in the 1980’s. The customers need by customers for beer that tasted different led to importation of beer into the United States. Some customers started consuming the new beers because of the choice that they now had. Changing legislation such as the legalization of brewpubs led to the proliferation of small brewers. The beer industry in the US in the next 25 years after the legalization has exhibited the characteristics of monopolistic competition for instance, the beers are differentiated in tastes thus the brewers have some considerable market power in their pricing. There are a large number of players in the industry occasioned by the ease of entry into the industry. There were also a significant number of firms which went out of business because they could not stand the competition. The differentiation of tastes led to the creation of small monopolies by the firms.

Oligopoly

Oligopoly is market structure where a few firms have a dominating effect on the market. The actions of any firm in the market affect the other actors who also take actions which affect the firm (Rittenberg & Tregarthen, pp. 283-286).  The oligopoly industries can make similar or differentiated products thus there is little price competition and prices are stable. According to Ghai & Gupta (pp. 39-46) the firms are referred to as pure oligopolies when they sell homogenous products and differential oligopolies when they sell different products for instance foodstuff, beers and electronics. Rittenberg & Tregarthen goes ahead to state that the firms in this market sometimes make abnormal profits resulting from the effects of collusion. Many or a few firms can form cartels so that they can reap excessive profits.  Finally, the markets are characterized by barriers to entry with the firms in the industry depending very much on each other. The concentration ration of the firms in the oligopoly can be very high for instance 6 firms can account for up to about 80% of the industry.

An example of a market under oligopoly is the motor vehicle manufacture industry. According to Rittenberg & Tregarthen (pp. 283), the discounts that were offered by General Motors Corporation (GMC) to their customers affected the other motor vehicle manufacturers. Ford responded by offering monetary rewards to the employees who managed to convince customers to buy from the firm. Rittenberg & Tregarthen goes ahead to state that, days later Chrysler indicated that they would wait for GMC to act again before they could also make their decisions. In the short-run, Chrysler offered discounts to their employees who bought cars from the firm. Toyota another player in the industry lowered its prices and devised some new ways to help people buy new cars such as easy financing options. In the above market, the action of GMC elicited responses from the major players in the industry. It should also be noted that the market has few firms with the individual firms having the market power to determine the prices at which their vehicles should be sold.

Conclusion

The different market structures are influenced by the prevailing conditions of the areas in which the firms operate. The exclusivity of the knowledge in the production process has also led to the development of certain structures in the market. However, there are market structures that result from illegal activities that may be carried out by the industry players; an example is the oligopoly market that developed as a result of the acts of collusion. OPEC formed between the oil producing nations has been a noteworthy example of the works of illegal cartels (Rittenberg & Tregarthen, pp. 120).

Works Cited

Ghai, Pankaj and Gupta, Anuj. Microeconomics Theory and Applications. New Delhi: Sarup & Sons, 2002.

Rather, John. "New Governor, New Energy Czar", The New York Times, January 28, 2007. Accessed august 15, 2011.

Riley, Geoff. Market Structures, 2006. Accessed on 15^th august, 2011 from

http://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.html

Rittenberg, Libby and Tregarthen, Timothy. Principles of microeconomics. Nyack, New York: Flatworld Knowledge, 2008.