Evaluation of Perfect and Imperfect Market Structures

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In today’s global economy, there are many business models. Perfect competition, imperfect competition, duopoly, oligopoly, and many others are examples. Many of these industry structures are influenced by different settings and modes of action. They are both affected by demand and resource rivalry. The optimal market competition and the imperfect market competition would be tested in this situation. A perfect business system is one in which the rivalry is considered to be perfect. This ensures that rivalry is at the highest level. There is no firm in this case that has a competitive advantage in terms of important knowledge, barrier to the entry of an organization, homogenous inputs and outputs, and many other factors that would lead to an advantage. The firms in the market are many and they all produce an identical product or service. In this case, there is normally no need for any kind of intervention from the government or any other relevant authority. On the other hand, a monopolistic market structure is where there are many firms that are operating in the market but their products cannot act as substitutes to each other desire being similar. All the firms in the market seem to have market power ability, but with time, this changes in one of the firms in the market gains an advantage and hence it gets the ability to dictate the market in that particular industry. As a result of the ability of the firm to dictate the, market, it makes excessive economic profits in the long run. Therefore, the two market structures above are different and this comparison is addressed in this paper.

In the perfect competition market structure is normally characterized by firms with homogenous products or services. This means that the firms or companies operating in this market structure offer the same good with the same quality. Hence, all the goods offered can be used to substitutes to each other and there is no preferred good when it comes to the preferences of the customer. There is no variation at all and all the firms are able to access market for their products. Additionally, the market in this case is comprised of many buyers and sellers. This means that the demand and supply of the product is there in plenty. As a result of this, there is no single firm or agent that can be able to change the structure of the market price of the commodity being offered (Helpman and Krugman, 1985). The entry of new firms on the, market is not prohibited. Moreover, the firms are free to leave the, market as they please without any consequences. This kind of market is mostly theoretical in nature. It does not happen in the real world.

The price changes or adjustments to the goods and services in this market structure happen instantaneously. It is the opposite of a monopolistic market structure as the characteristics are different and opposite to a monopolistic market structure. Hence, any flexibility does not take a long time to be realized. All of the firms are able to recognize and act ion the price adjustment without any delay. The price adjustment also affects all the firms in the market equally and none of them can capitalize on the change. In the business world, the information is extremely important (Shepherd, 1972). This means that any new information on ways of production, delivery of service and any other information relevant to the firms in terms of how they can capitalize. Therefore, information can ensure one firm to gain an advantage over other firms in the market. However, in this market structure, all the firms and businesses in the market have the same access to information and their utilization of the information acquired is equal. None of them can take advantage of the information to gain competitive advantage.

It can, therefore, be said that in perfect competition, the firms participating in the market are equally capable of making a profit. The profit that a firm makes, in this case, is only capable of keeping the company afloat to conduct its normal business (Gordon, 1982). There are no supernormal profits. The profit is totally normal and the changes in profit are uniform to all the firms. In case a situation arises where one fir or several firms make a profit that is greater than the normal profit, then other firms can enter the market and reduce the profits attained by the existing firms, thereby reducing the profit back to the normal or expected profits according to the supply and demand rules in the market (Lundvall et al., 1988).

Due to the equality that is achieved in the perfect market structure, there is no need for any government intervention or any other intervention that is meant to bring equality in the market. This is because all the firms have an equal chance of making profits and hence none of them can complain about unfairness in the market. The firms are all capable of competing on an equal ground which makes them free to do whatever they please as long as they do not violate the business practices.

The perfect competition market structure can generally be regarded as a theoretical market structure. It is extremely rare to have a situation where the businesses in a market can have an equal advantage of making profits. This is mainly because it is not possible for all the firms operating in a market to have an equal access to information that they can use to take an economic advantage with (Sarasvathy et al., 2003). The research conducted by various firms cannot allow the equality expected in the perfect competition market structure. Additionally, it is not possible to have businesses with the same capital availability. Some businesses are capable of accessing more capital than others, which can be used to gain a competitive advantage. Moreover, businesses cannot provide the same exact product or service to the customers, such that all the products or services are capable of being perfect substitutes to each other. This means that some of the firms can improvise their services or products to ensure they have a competitive advantage in the market place. Therefore, it is not possible to have this kind of market structure in the real world due to the various factors that are available to the firms for the sake of creating a competitive advantage.

A perfectly competitive market structure can be affected in many ways by international trade or the direct foreign investment in the economy. It can lead to a situation where the various firms in the market are unable to gain the kind of fair profit that they used to gain. The businesses in a perfectly competitive market have no ability to successfully compete with foreign innovations and hence they are most likely to fail. This is because the foreign investment or international trade subjects them to the various innovations that they did not possess in their domestic market (Kolmar, 2017). As a result, they are unable to cope with the changes that occur, leading to a collapse of most of them. International trade introduces the latest and best innovation in a certain market, and hence it is capable of eliminating all or some of the players in that market structure.

There are various advantages and disadvantages associated with a perfect market structure. One of the advantages of this structure is the low probability of consumer exploitation. This is because the sellers in the market have no control over the price and hence they cannot exploit the buyer of the services or goods offered (Peneder, 2017). The other merit of this market structure is that the consumers are able to get standardized goods and services. The consumer is the main decider in this case and hence it is not possible to exploit them.

The disadvantages that are associated with this market structure include the fact that the sellers of the product or service have no incentive to come up with innovations that they can use to gain competitive advantage. This leaves the products sold standardized and the creativity and improvement of the products get compromised. It is also possible for the firms in a better location to sell more than the rest of the firms as the prices are the same and hence they enjoy the convenience brought about by their geographical location. New players can also join the market, which leaves the current firms in the market with lower profits (Chang and Lai, 2017).

On the other hand, an imperfect market structure is where one of the firms operating in the market can be able to undertake any kind of innovation to give it a competitive advantage. Hence, one of the firms in the market can be able to undertake certain efforts that give it excessive profits that can compare to other firms or businesses (Dunn, 2017). This is a common occurrence in the business world and it is more practical than the perfect competition market structure. It is also called a monopolistic market structure. There are several types of monopolies. These include a natural monopoly, which comes up as a result of the natural situations in the market, public monopolies that belong to the government aimed at providing essential services and goods, simple monopolies, legal monopolies, discriminative monopolies, and much more.

In this kind of market structure, one of the firms in the market is capable of gaining a competitive advantage over all the other businesses. Hence, it is capable of gaining an extra advantage in terms of the profits it makes. There are many factors that describe this kind of market stricture. Normally, one of the firms in the market gains an advantage over the other firms and it makes more profits (ValentinoS, 2017). This happens due to the fact that the firm has an improved version of the product that is offered or the service.

In this kind of market, there is no homogeneity of a product that is associated with the perfect market competition. In this case, one of the players in the market is capable of coming up with a product that is different. Hence, the product that is brought about by the monopolistic competitor has no substitutes, and hence the customers have no other option but to purchase this superior product (Posner and Weyl, 2017). There are many examples of the monopolistic firms in different markets of the world. A good example is Microsoft, which is a big software company that has been around for several decades. It has become difficult, if not impossible for many customers to choose any other operating system that is not windows. Windows has gained its competitive advantage as a result of many factors that have come up in its operation. One of them is longevity. It has been in existence for decades and people have gotten used to the products of windows. The other factor that has made the company gain a monopolistic advantage over the other players in the software industry is the fact that they have managed to bring about new innovation in the field (Park, 2017). They have gained a superior knowledge of the field, and therefore they are able to dictate what is bound to happen.

The entrance of a new firm in this market is also limited. This means that it is not easy for a new firm to enter the market without encountering certain unfavorable problems. This happens because the monopolistic firm or the firm that has a competitive advantage over the other firms is able to manipulate the profits gained, and hence, a new firm has no definite way of making it into the market without suffering dire consequences that include extreme losses. As a result of the ability of a present firm to make adjustments to the profits, the introduction of a new firm is difficult. The current players in the market can also not be able to increase their profits to enable them to compete with the current market-dominating firm (Cheung, 2015). In this case, the demand is usually elastic. This means that the changes in price can affect the market.

In the beginning of the monopolistic market stricture, the competition is usually positive, where the economic profit that is gained by the various market players is balanced. However, as the time goes, some or mostly one of the firms gain a competitive advantage over the others and hence it makes profits that are higher than the expected economic profits (Mallick, 2014).

In a monopolistic market structure, the products are highly differentiated. Additionally, there are many firms that are capable of proving the certain good or product. Another industry example that is applicable to this market structure is the home care structure where the different homes that care for the older citizens have different services offered, which leads to some of them acquiring more customers than the rest of the firms. Thus, the main firm in the market ignores the changes that it causes in the market structure and keeps on making more profit (Stiglitz and Rosengard, 2015).

Another aspect of the monopolistic market structure is the maintenance of a spare capacity. The certain models and settings that are applicable to this market structure are the ones that are applied to come up with a model for different sectors and industries. These models are more common in big cities and they are found in various industries such as clothing, cereal, restaurant and shoe industries. This happens because the monopolistic supplier firm is normally the exclusive player in the industry. It is presumed that the monopolistic company or firm is can produce commodities that are indifferent from the rest of the supply market. The demand in this market structure is inelastic (Hawley, 2015).

As a result of the inelasticity of the demand in the market structure, new firms can only enter the market in the long-run. The monopolistic firm has the ability to make independent decisions compared to the other players in the industry. Moreover, the information available to the buyers and also the sellers is not uniform and hence it is possible to take advantage of the know-how. The monopolistic company has an access to superior information that can be used to gain competitive advantage. With this information, the monopolistic firm can bring about a change in the price of the products or services that it offers. However, the buyers or consumers still have a certain degree of controlling the price (Millot and Llerena, 2013).

Due to the various aspects that favor the monopolistic firm, the government or any other relevant authority has to make sure that it intervenes in the market to ensure that the other firms are not running out of operation. This is because without an intervention, this kind of market structure can end up producing only a single player in the supply market, and as a result affecting the prices of the products diversely. When only a single firm can provide the services or goods that are needed by the buyers, then they get the ability to manipulate the price as much as they want to (Birch and Siemiatycki, 2016). Hence, it is important to make sure that the monopolistic firm in an industry does not eliminate all the competition using its competitive advantage. This is the major reason why the government or any other relevant authority has to make sure that it regulates the monopolistic market structure.

In this market structure, the knowledge can be said to be wild spread when it comes to the participants. However, the knowledge availability is limited. Hence, the buyers of the service or the product can experiment with the various products available in the market, but the buyer ends up appreciation g and choosing one of the products or services.

In the monopolistic market structure, the owner of the business or the entrepreneur has a bigger role to pay than in a perfectly competitive, market structure. This is because the business owner, in this case, has to make sure that he or she comes up with a competitive advantage over the rest of the firms in the market. If he or she is not able to do this, then his business easily goes underground (Blair and DePasquale, 2014). Therefore, the business owner has to be creative as, much as possible to ensure that his business survives the extremely competitive businesses.

As it has been said, the products found in the monopolistic market structure are differentiated. These differentiated products occur in several different types. One of the products is the differentiation of the physical product. In this case, the firms can be able to use the design, size, shape, color and many other physical attributes to make their product become different. The other product differentiation is in terms of marketing. In this case, the different firms try to come up with products that are packaged uniquely, and other attractive features. A good example of this is the packaging done in different cereals so as to gain an advantage.

The other differentiation that firms come up with in the case of a monopolistic market structure is in terms of human capital. In this case, the firms do their best to take advantage of the skills of their staff, the way the staff dresses, and the various training routines that their employees have undergone. Additionally, it is possible for the firms to take advantage of the distribution channels that they possess. This is applicable where the firm can come up with superior ways of marketing their products. An example of a superior distribution in the modern world is the use of Amazon, Facebook, mail, and many other modern ways of ensuring the products move fast.

The firms in a monopolistic market structure usually encounter a demand curve that slopes downwards. This is due to the fact that all the firms in the market make products that are unique and hence, they can be able to charge prices that are lower or higher in comparison to its rivals. Therefore, the firm is free to come up with a personal price and it does not need to look at the price of the competitor (Hovenkamp and Hovenkamp, 2016). However, the firms still have to make sure that they consider the price of the market as a guideline when setting their prices.

The firms that are found in a monopolistic market structure also have to incorporate advertising in order to market their products. This is because there are many firms in the market that offer similar goods and hence each firm has to make sure that it engages a fierce competition in order to show the market the difference between the products that they are offering and the ones offered by the rival firms.

Therefore, the firms in a monopolistic competition have the ability to maximize their profits. This all depends on the creativity of the business owner in coming up with new ways to make sure that the firm survives in the highly competitive environment. In the short-run, it is possible for the firms in the market structure to make abnormal profits. These change in the long-run where new firms are attracted to enter the market as a result of the supernormal profits being made by some of the firms. As a result, the profits reduce and the firms make normal profits.

In the short-run, the monopolistic firms maximize their profits when the marginal revenue is equal to the marginal cost. When the price is above the absolute total cost, the firms make supernormal profits. In case a new firm comes into the market, the demand for the products of the company becomes elastic in nature and hence this leads to a situation where the prices are driven downwards (Valentino, 2017).

In the long-run, more firms end up entering the market which leads to a situation where the profits reduce to a normal level. This gets rid of all the supernormal profits in the organization. Therefore, in case a firm wishes to make continue super-normal profits, it has to make sure that they stay in the short-run point of the supply and demand. This is where the supernormal profits are found. The most innovative firm cam be able to maintain the short-run period, it is also possible for the firm with the most relevant knowledge, creativity, and capital to maintain this position of supernormal profits, hence creating a monopolistic situation in the market.

There are certain advantages and disadvantages of this kind of market structure. One of the positive outcomes of a monopolistic market structure is the avoidance of duplication situations. This means that the wastage of resources is minimized. The problem of duplication affects different countries in the world and hence it is important to eliminate it, therefore, monopoly naturally gets rid of this. It is possible for the consumer to benefit from the various advantages that arise from the monopoly. An example is the economies of scale, where the cost of production goes down as a result of the monopolistic nature of the firm, which can, in turn, reduce the buying price of the product.

The monopolistic firms make huge profits in their operation. Therefore, they can be used for research so as to ensure the long-run benefits to the consumer. Efficiency is also promoted by monopolies because the firms that enjoy monopolistic advantages can easily adopt the use of new technology and new production methods. Additionally, the government can be able to make more money in terms of taxes charged on the huge profits of a monopoly (Valentino, 2017).

However, despite, the various advantages that are associated with a monopoly, there are problems that arise in the economy due to this market structure. One of them is the exploitation of the consumers in the market. Since the monopolistic firms can be able to manipulate the prices of the products they offer, it becomes easy for them to exploit the consumer through over-charging. It also becomes possible to have a situation where the goods offered are of low quality due to the lack of competition. The firm that enjoys monopolistic advantages does not feel obliged to offer the best goods and services because it can survive and make profits by offering the same goods and services.

Therefore, it can be seen that there are various differences between the perfect and imperfect market structures. As a matter of fact, the two can be regarded as being opposites. This is because the factors that lead to the occurrence of one, lead to the disappearance of the other. Both of the two market structure has advantages and disadvantages. However, it can be said that in many cases, the monopolistic market structure is more likely to encounter a government intervention than the perfect market structure. However, the perfect market structure inhibits the ability of innovation and creativity, which leaves the economy of a country without the most reliable products and services.

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