the market structure

Each type of market structure

Each type of market structure has its own collection of assumptions and characteristics. A market is made up of the suppliers and buyers of specific services or products. A producer's primary goal is to maximize benefit, while a user's goal is to maximize pleasure. Firms determine how much production to make and how much to charge for their goods. However, this is dependent on the business structure under which the firms work. The business structure under which the companies operate often has an impact on their behavior. Market structure refers to the number of firms in the market, market share, and level of competition. The market structure is further characterized by the amount of barriers entering the marketplace. Knowledge shared by businesses in the market and extent to which goods are similar also determine the market structure. The number of operating companies vary from one to many. Buyers will have complete information if they are aware of the price and output in the market. If any producers raise the price, the customers can shift to buy the goods or services from another producer. However, perfect knowledge may not mean all consumers and sellers possess the complete knowledge, but it means the information is freely available. Individual firms sometimes fail to know the inventions and innovations being introduced. Where firms are interdependent, the actions of one company significantly influence the actions of the rest of the businesses in that market.

Perfect Competition

Perfect competition is a form of a market categorized by many firms, each smaller than the entire market (Carlton & Perloff, 2015). Agricultural market is a good example to demonstrate the perfect competition. The companies produce similar products as they have access to the same technology. No enterprise has benefit over the others in commerce. Firms lack market power, and they are price takers, therefore do not have any control over the products they sell. The market forces of demand and supply determine the price. The firms sell similar products and are exposed to competition from new businesses entering the market as there is no restriction to entry.The individual demand curves are horizontal (perfectly elastic). Price will always be set at the prevailing market price. Raising the price above the equilibrium will reduce the firm's sales given that other sellers sell a similar product. A company would not want to lower the price to avoid a reduction in revenue. Companies maximize their profits by producing quantities where marginal return is equivalent to marginal cost. Economic benefits attract other firms into the market, although losses lead many extiting after a while. As new corporations move in the market, the supply curve changes to the right reducing the costs until economic returns becomes zero in the long-term. On the other hand, the demand curve moves to the left due to economic forces making firms to leave the market (Kolmar, 2017). Price rises and the adjustments continue until the losses are eradicated, and the economic gains, in the end, are equal to zero. In the long run, efficiency is achieved, since the economy is at rest, positive economic profits do not exist to attract new firms, and neither do negative economic profits are in place to force companies to leave. The government has a limited role in this form of market.

Monopolistic Competition

It is a form of a market characterized by many firms and consumers, and no business has complete control over the market price (Adlakha et al., 2015). The producers have, to an extent, a degree of control over the price in the market. The goods produced are heterogeneous to mean different. In this market, there are few barriers to entry and exit which tend to instill some level of competition and firms tend to be more efficient. If the existing companies earn an economic profit, other companies will enter the industry which reduces the benefits of the existing businesses. More companies continue to come and stop where all firms are earning normal profits. If more and more companies continue to get into the market, the inefficient firms begin to make losses and consequently leave the market. The condition is restored, and the remaining companies start to make reasonable profits. Nonetheless, every company creates a product that is quite different from those manufactured by other industries termed as product differentiation (Carlton & Perloff, 2015). Product differentiation is the basis of competition in this market. The Rothschild keys are more than zero. The hotels in a city comprising several food establishments work in a monopolistic competitive business. The demand curve is elastic because although the firms do sell various products, many are close substitutes. If a firm upsurges its price, a few of its consumers will diverge and switch to the products prepared by different companies. The downward sloping demand curve ensures that the marginal revenue is always less than the market price, which means it can only increase demand by lowering the price of all its products. Hence, firms maximize their profits by manufacturing at the plug where the marginal income matches marginal cost both in the short and long run (Kolmar, 2017).

Oligopoly

In this market, there are limited large companies which tend to control the market. Oligopoly marketplace, companies produce similar goods or facilities that are not perfect substitutes (Kolmar, 2017). Individual companies can influence the market share of the other companies. Firms spend a considerable amount on promotional measures like advertising to gain more market share. Companies in highly concentrated industries such as the airline operate in this market. Entry is possible though not easy leading only to a few firms in the industry. Mutual interdependence brings uncertainty for all of the companies (Ovodenko, 2016). As a result, estimating the quantity demanded at different price levels is extremely difficult. When firms produce slightly different products, and that differentiation can be discerned by consumers, each company behaves like a monopolist regarding price setting and output determination. Numerous health-related possessions and services strive under this market assembly. For instance, in a society, three to four amenities might offer comparable outpatient surgical services. When one firm raises prices, other companies do not follow suit, and the business loses customers. But if a firm lowers its price, other firms will respond by reducing their prices too (Ovodenko, 2016). Government intervenes in this market to ensure that harmful cartels are not formed.

Monopoly

Monopoly firm is a only producer of a merchandise in the appropriate market (Carlton & Perloff, 2015). Certain towns have one gasoline station that establishes a indigenous monopoly. The gasoline station is a monopoly because it's the only firm that produces the gas and decides the price at which to sell it. Besides, there exists no close substitute for the gas. Monopoly capitalizes on their locus by limiting output and charging a price above marginal cost. Customers cannot move to a different producer due to higher prices because there are no other firms in the market. For the monopoly markets, there is high concentration, and the Rothschild index is unity. As the sole producer in the market, a monopoly has control on the price and quantity is produced. If the monopoly raises the prices of the products, a buyer has no other option but to buy the good at the price. Demand curve is downward sloping. Profit is exploited where marginal revenue is equivalent to the marginal rate. Government will want to protect consumer's interest through the regulations put on monopolies which include price cutting to eliminate monopoly power. Without government intervention, monopolies may set their prices above the socially optimal price, that is the equilibrium price (Anno, & Kurino, 2016). To an extent, the monopolies could also offer services of poor quality. Thus, government restrictions ensure monopolies produce high standard goods. Natural monopolies exist which call for government intervention of the government to prevent exploitation of monopoly power. The government has created regulatory bodies such as ORR for the regulation of the privatized industries like the water industry. The antitrust risk analyses check whether a merger or acquisition could lead to a monopoly and relevant measures taken to curb the situation. A monopoly can be broken by the government in instances that it becomes too powerful. All this is for the interest of the consumers.

Effect of International Trade on Market Structures

International trade exposes the national economy to new avenues outside the country for exchange of goods and services, and this brings along effects on the market structure in the local economy. In perfect competition, competition is highly promoted, and since the market deals with similar products, consumers' bucket to choose from is an increase. For the monopolistic competition, the effect is in the differentiated products. It ensures that the differentiated products are of high quality. In oligopoly market, international trade enhances price reduction. To the monopoly structure, international trade eliminates price exploitation since the market is open to capital investment from the private companies.

Effects of High Entry Barriers

The obstacles that prevent or make its hard for fresh firms to go in the market are caused by entry barriers. The regulations imposed by the government in a market may act as a block to businesses aiming to join the market. The high start-up cost is a major challenge, especially for small businesses. The businesses have a little potential for getting loans as start-up capital, leaving only companies which can raise enough money to join the market.The existing firms may also have a competitive response to companies intending to enter the market. Such firms tend to lower the prices of their products, such that the companies joining the market are unable to produce below that price or at an equal price.Access to the supply of raw materials is another major barrier. Natural monopolies exist due to ownership of certain raw materials. Large firms take advantage of the economies of scale. A small business which does not enjoy economies of scale is at a disadvantage as compared to the more dominant companies. The small business will therefore not compete with the larger ones. The high barriers have an impact on the long run profitability of firms. To start with, the level of competition is reduced. The competition will only exist if no company operates at an advantage over the others. The competition will further be enhanced if there are many societies in the market. It is evident why there is no competitive pressure in the monopoly market. Monopoly market has only one firm which has complete market power. In the long run, a monopoly and an oligopoly firm will continue to enjoy the abnormal profits. The entry barriers prevent other companies from entering the market to share the benefits. The abnormal profits are reinvested to generate more and more profits. Investment in research and development increases the entry barrier.High entry barriers raise the cost of production in firms. Such companies are less efficient and compromise the quality of their products to sell them at the market price. Marginal cost is high for the companies, and they are forced not to produce products whose value is more than the minimal cost.Inefficient firms like the monopoly survive in the market. A monopoly faces no competition and will produce lower quantities at higher prices as compared to if the market was competitive. The government restrictions check on the operation of the monopoly, unlike the market barriers.To avoid the entry constraints, entrepreneurs develop substitute goods for the products supplied by the incumbent firms in an attempt to penetrate the market.

Market to Sell Products

Considering the above forms of market structures, a seller would prefer to operate in a perfectly competitive market (Kolmar, 2017). The market has no entry barrier. So long as the existing firms are making positive economic profits, companies will quickly find their entry into the market. After long years of operation and businesses realize negative economic profits, they can easily exit the market to avoid further losses. The companies use similar technology and face the same production function putting all the firms at an equal opportunity for competition. The government does not interfere with the operation of the competitive market structure with rules and regulations on how to do business. Purely forces of demand and supply are left to readjust the market and bring along equilibrium. Market externalities do not exist, which means that external costs and benefits to third parties not involved do not exist. Complete information among sellers makes it even better; the firms do not invest in advertising and therefore reduce cost (Anno et al. 2016). Further, because of perfect knowledge, companies can sell all they produce. The sellers are free to sell whichever product they wish, and the factors of production are mobile. The firms do not spend on advertising since there is perfect knowledge of the goods and services produced in this market.

Market to Buy Products

To a buyer, the market is still the ideal place (Adlakha et al., 2015). With a lot of competition, the firms produce at a lower marginal cost and to maximize the profits, the MC=P, the price is also lower. The high competition will force the producers to be more efficient, to the benefit of buyers. Complete information helps the consumers to make rational decisions leading to maximum utility and perfect deals. The users can maximize their preferences conditional to the budget constraints. When the consumer demand increases, the producers respond by supplying more of the good to meet the growing consumer demand. In this market the allocation of resources is optimal.

Conclusion

Firms behave differently in the relevant market structure. The level of competition and the level of barriers to entry and exit from the market are critical for the behavior of the firms in the market. High level of competition tends to instill efficiency in the market leading to consumer welfare. In a market where there is no barrier to entry and exit, competition is very high, and the less efficient markets are driven out of the market. Production of substitute goods does not guarantee the inefficient firms existence in the market. The government intervenes to ensure that there is fair competition in the market. It does so through the rules and regulations like the minimum price requirement. The minimum price requirement ensures that firms do not lower their prices below the required price, as this could lead to unfair competition. International trade is vital in the market. The business influences the way the firms conduct themselves. Competition is enhanced, and more various products are added to the market.

References

Adlakha, S., Johari, R., & Weintraub, G. Y. (2015). Equilibria of dynamic games with many players: Existence, approximation, & market structure. Journal of Economic Theory, 156, 269-316.

Anno, H., & Kurino, M. (2016). On the operation of multiple matching markets. Games & Economic Behavior, 100166-185. doi:10.1016/j.geb.2016.10.001

Carlton, D. W., & Perloff, J. M. (2015). Modern industrial organization. Pearson Higher Ed.

Kolmar, M. (2017). Introduction. In Principles of Microeconomics (pp. 45-53). Springer, Cham.

Ovodenko, A. (2016). Governing oligopolies: Global regimes and market structure. Global Environmental Politics, 16(3), 106-126. doi:10.1162/GLEP_a_00368