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Market Structure and the Role of the Government (Essay Sample)


This paper discusses the different types of market structures and the role that the government plays.

Market Structure and the Role of the Government
Market Structure and the Role of the Government
An industry is comprised of all firms making identical or similar products (Dewar, 2010). The kind of market structure existing in an industry depends on the number of firms and nature of competition in that industry. The four primary market structures include perfect competition, monopoly, oligopoly, and monopolistic competition (Dewar, 2010). In a perfect competition market, there are many sellers and many buyers. In this case, no particular seller’s decision will impact on the market prices. In this kind of market structure, firms are price takers and products are homogeneous. A monopoly market structure exists when a single producer is the sole provider of a given product that has no close substitutes. In this kind of market, the firm is the price maker and entry and exit by other firms is blocked. In a monopolistic competition market situation, there is a large number of sellers offering similar but differentiated products. In this kind of industry, each firm represents just a small percentage of the total market. In addition, there market entry and exit is easy. In an oligopolistic market situation, there are few firms that produce similar or differentiated products. These firms are mainly large corporations that dominate the market. Entry into this kind of market is hard since the few existing firms enjoy great economies of scale (Dewar, 2010).
A monopolistically competitive market consist a large number of small firms making similar but differentiated products (Dewar, 2010). These firms have a relatively large and flexible resource base, with extensive market knowledge. In this case, each firm depicts some kind of market control thus facing a demand curve that is negatively sloped. In the short run, firms in a monopolistically competitive market are making economic profit. The condition of free entry and exit in this market allows other firms to enter the market thus driving economic profits to zero in the long run. In the presence of many firms, every seller in the monopolistically competitive market pursues maximum profits by adjusting the long-run plant size and short-run production (Schotter, 2009). In this pursuit, the quantity produced equals the marginal revenue. That is, marginal cost is equal to marginal revenue. Economic profit and loss are the major driving forces for the entry and exit of firms in a monopolistic industry. In this way, the economic profits earned by firms induce the entry of other firms that in turn drive the profits to zero (Schotter, 2009).
A public good refers to a product whose consumption by any one individual does not reduce its availability to another person and from which no one is excluded (Schotter, 2009). Public goods exhibit two major characteristics. These are non-excludability in use and non-rivalry in consumption. A good is non-rivalrous if one individual’s consumption cannot hamper or reduce other people’s ability to consume the product. A good is non-excludable if it counterproductive and expensive to exclude some people from using it (Schotter, 2009). The failure to consider the marginal social cost of consumption usually leads to congestion of a public good. In addition, a public good is said to be indivisible. That is, a public good cannot reasonably be divided into smaller units. Public goods are mainly provided through public policies. This condition usually leads to conflicts between the interest of individual consumers and different groups. The conflict between group interest and self-interest results to an outcome, the prisoner’s dilemma. The prisoner’s dilemma kind of utility outcome corresponds to the Pareto-inferior allocation of goods in an economy (Dewar, 2010).
Product differentiation exists in two types. These are artificial product differentiation and real product differentiation (Dewar, 2010). Artificial product differentiation occurs when products provided in a market setting are the same. However, consumers are influenced through packaging, sales techniques, advertising, and other marketing activities, to perceive the products as different. Producers and manufacturers create differences in the product packaging, brand name, size, shape, and design in order to persuade the consumers. In front of artificial product differentiation, sellers exhibit some degree of monopoly power where they manipulate a product in the process of searching or making their own prices (Schotter, 2009). In the process, consumers’ choice of preference is affected. That is, a consumer will be willing to pay for a product depending on the seller’s marketing strategy, price, and the consumer’s perception of a given s...
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