Market Structures:Perfect and Monopolistic Competition & Oligopoly (Essay Sample)

MARKET STRUCTURES
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Market structures
Introduction
Market structure refers to the general characteristics of a market defined by a range of aspect comprising of companies selling and buying products and services, their strength of negotiation, their concentration within the market, form and levels of competition, nature of product differentiation and level of ease in entry and exit of the market. The four basic market structures include: perfect competition, monopolistic competition, oligopoly and monopoly.
There exist a common grounds where every firm wishes to establish itself in different perspectives in such a way that it achieves particular goals and objectives which might in some aspects be similar to the other organization. The market structure therefore becomes a key factor as it plays a major role in differentiating one organization from the other. "Markets in which firms can differentiate their products are especially complex, as each individual firm’s product choice affects its own profitability, and the extent of product differentiation influences the intensity of competition for all markets participants." Mazzeo, (2002).
Perfect competition
In perfect competition, there exist limited control of market prices by individuals buyers and sellers as the number of agent is so numerous and greatly informed. Price taker refers to the single firm developing it prices in accordance to the whole industry. It cannot increase its price as this would result to poor sales as consumer would opt for similar product going for cheaper prices from other firms. A rational producer will also not lower the price beyond the common price given that it can sell as the better price. Mas-Colell (1998) defines perfect competition as "a situation characterized by, first, the universality of markets and, second, the absence of monopoly power" that is, "perfect competition prevails if an equilibrium is reached non-cooperatively, in an environment where prices are quoted in every possible market and taken as given by every economic agent. " For this reason, the level of competition is at the pick. It is believed that in this type of market structure, consumers and society will have the best possible outcomes as they have a wide range of choices to choose from. Most of the firms product, unit of input such labor units are identical and homogenous unbranded services and products.
In the long run, normal profit margins are experienced among the firms although super-normal (abnormal) profits can also be experienced in the short run. There is also minimal likely of inefficient firms to thrive since most of the firms are placed on similar grounds by the market structure. Perfect competition is viewed as "not a good" market structure since it does not allow for competition or innovation among the participant. For this reason, it encourage increased wastage of resources and exploitation of customer by seller through setting high prices for products and services thus enjoying high profit margins.
There exist a wide range of knowledge among the participants which make it possible for all agents to have what is required for their individuals or business needs competitively. This situation minimizes risk taking as the participant are fully aware of the ventures into which they are involved in and thus leading to existence of limited role of entrepreneur. Since these consumer and producers possess perfect knowledge in the field, they make rational decisions in order to maximum their self-interests. Producers tend to develop approaches in order to maximize their profits and efficiency whereas consumers tend to maximize their utility. It assumes absence of externalities, that is, absence of external benefits or costs to third parties being involved in the transactions.
There exist no barriers to entry and exit out of the market as there are too many firms in the market in such a way that they cannot be measured. In such a market structure, government regulations may not be required except in interventions intended to make the market more competitive. Azevedo & Gottlieb (2015) proposes a perfectly competitive model of a market with adverse selection. "Prices are determined by zero-profit conditions, and the set of traded contracts is determined by free entry. Crucially for applications, contract characteristics are endogenously determined, consumers may have multiple dimensions of private information, and an equilibrium always exists.”
An example of perfect competition is the agricultural markets where several farmers produce identical products in the market where there exist a huge number of buyers. They usually compare the prices and get close in such a way that constitutes a perfect competition. Internet related industries also structure themselves to almost perfect competition as internet marketers can easily compare their prices, efficiently and quickly. Firms selling products online will tend to reduce their prices so as to match similar companies thus evading the failure which would result from lack of customers due to high prices. However, this type of market structure is rarely achieved to a hundred percent.
Monopolistic competition
In monopolistic competition, producers will tend to develop differentiated products for example through quality and branding thus developing an imperfect competition within the market. According to Hunt (2011), a number of assumption have been made in an attempt to explain monopolistic competition. "Applies to those industries in which there is product differentiation." The second is that, "product differentiation is the state of affairs in an industry that results from both heterogeneous demand”. The third is that, "monopolistic competition is to be judged using perfect competition (or ‘‘pure’’ competition in Chamberlin’s terminology) as the reference." In order for each firm to maintain uniqueness, there exist four major type of product differentiation which include: physical, market, distribution and human capital.
Participants involved in the sale of products and services within monopolistic completion are considered to be profit maximizers due to a reduced number of business and increased number of entrepreneurs managing the business. The firms involved are usually independent and activily competing against each other. "The effect of monopoly elements on the individual’s adjustment is characteristically to render his price higher and scale of production smaller than under pure competition. This is the result of the sloping demand curve, as compared with the perfectly horizontal one of pure competition." Chamberlin, 1962.
Monopolistic competition is the most common market structure among most small industries such as high street restaurant and stores offer and possess element of uniqueness so as to enable them to compete for the same customers. Based on the costs of production, firms’ products and the market, each firm makes an independent decisions about the out and the prices for each output. There exist limited knowledge being passed between the participants thus making some to be ahead of others in different perspectives. However the knowledge is widely spread between participants. Unlike in perfect competition, there exist an increased exposure to risk in decision making and this provides the entrepreneur with a more significant role. There exist no major barriers to exiting and entry into the market hence providing freedom to enter or leave the market. There is a tendency for excessive capacity as firms may never fully exploit their fixed factors due to difficulty in mass production. Therefore, they are productively inefficient in both short and long run. T
Firms are considered as price makers as they can regulate their prices in accordance to that of the competitor due to differences in the type of offering among the firms. Other than just adopting the selling prices of the participants as a whole, the firms can also develop their own prices in accordance to the products and service offering variety. Advertising is a unique feature in monopolistic competition due to the fierce competition existing between the firms within the market. Every company tries its best to make the quality or even prices known to customer I such a way that they will prefer the firms to others. This type of market structure encourages innovation among the participants.
Oligopoly
In oligopoly, there exists a few number of firm dominating the market over the others. Unlike in monopoly where a single corporation takes huge segment of the market, a few companies dominates the market in oligopoly. Although most of these firm may seem to be competing within the market, the companies tend to corporate in some aspects thus leading to higher prices for consumers. In this market structure, although large companies dominate the market, there is a high likelihood that small companies are also running and operating within the market.
The main identification factor in oligopolies is the concentration ratios where an assessment of the market share proportionality identi...