Benefits and Costs of Competitive Market Structures
Competitive market structures, such as perfect competition and monopolistic competition, have the benefit that efficiency is high. Sellers aim at providing high quality goods and outdoing one another to attract and retain consumers. This is beneficial to the consumers who enjoy high quality of goods. Furthermore, the prices of goods are affordable as sellers aim setting prices that will attract more clients. Consumers experience a higher purchasing power with the same level of income. Consumers enjoy a wide range of goods courtesy of the sellers’ efforts in branding. The high quality and wide variety of good at affordable prices improves the buyers’ standard of living.
The competitive market is also beneficial to the sellers. This is because of the innovations that come with competition as firm try to minimize costs and remain afloat amidst a highly competitive market. The firm develops effective strategies in its business operations and eventually profits trickle in. This is coupled with the knowledge of the best work practices and adjustments to market conditions. Competition results in mass production of goods in response to the consumers’ demands. This is as opposed to strategies such as hoarding that exist where there is little or no competition. Local competition among firms leads to an improvement in international competitiveness. This high performance results in a growth in the demand for export goods. This increases the country’s GDP and results in growth of industries.
However, competitive market structures also have certain costs or disadvantages that come with their existence. Price discrimination is one of the costs of competition. This is the sale of the same good at different prices within the same market. This arises because every seller has the right to fix his price of sale and it is the buyer’s decision on which seller to select. In a monopolistic type of competition, some firms utilize price leadership to enjoy dominance of the market. This is where firms set the main price, within the market, which all other firms follow. Consumers in such a market are subject to the prices set, and demand had little effect on the price. Competition may also result in the crumbling of weaker or upcoming markets. This is especially so if the competition is very stiff and companies are unable to be innovative enough to attract new clients. This limits growth of industries within a country.
Benefits and Costs of Less Competitive Market Structures
Less competitive market structures such as oligopolies and monopolies are especially beneficial to sellers than to the buyers in a market. Such sellers enjoy the certainty of income and abnormal profits. This is due to presence of barriers to entry to the market and hence a lack of competition (in a monopoly). There is minimal duplication of goods and hence effective utilization of resources. Firms with minimal competition have sufficient funds to invest in research and technological innovations. This improves efficiency even further. Such firms also use price discrimination to suit the needs of consumers with different income levels. The large size of these firms allows them to enjoy economies of scale.
However, the minimal competition results in lack of any sovereignty of the consumers. The goods sold may also be of poor quality due to the lack of competition and alternatives. Consumers do not enjoy a wide variety of goods and their choices are limited. Lack of competition may result in inefficiencies and poor management of firms due to the predictable nature of the sale of goods. Collusion among firm, in an oligopolistic market, results in setting of prices that are unaffected by changes in demand. Consumers have no effect on the prices of goods.
