Month Day, Year
Introduction
This purpose of this report is to an analysis different market structures in my local city. The report will assist my mayor to know the kind of businesses in the city. I will analyze the four market structures that I learned in class and then relate them to my local city. The market structures include monopoly, a situation in which there is only a single firm in a particular industry. Oligopoly is the second market structure, where there are a few enterprises and many buyers in a certain industry. The third is monopolist competition, whereby many sellers offer closely related products to many buyers. In this market structure, profitability is determined by prices and level of customer satisfaction. The last market structure is perfect competition, whereby few sellers offer similar products to many buyers. In this market, the action of a single firm doesn’t affect the other market players. The report includes real-life market structures in the analysis to ensure the local mayor understands the city better.
Additionally, the report examines how high entry barriers impact the long-run profitability of various market structures. In this part, the paper focuses on oligopoly and monopoly, since they are the only markets with strict entry hurdles. Further, it explains the competitive intensity that exists in markets with strict entry hindrances. There is a keen analysis of the relationship between prices and demand in the four market settings and the effects on profits. Also, the report examines the interaction of the government and the various market structures and the effects on production. Finally, it will focus on the impacts of international trade on the four market structures.
Market structure
Different market structures exist in the economy and all aim at making profits by serving customers with the desired products. Ideally, each market has distinct aspects that make it stand out in the economy. Although the markets face different entry challenges, they have one factor in common; all strive to make profits. Firms achieve that by using various innovative marketing methods such as price reduction, product differentiation and taking advantage of demand. Similar products can be marketed at different selling points to appealing the consumers. Most importantly, apart from monopoly, all the other market structures should seek to gain substantial market share and customer loyalty, which will ensure continuous profits.
Monopoly
A monopoly is a market structure with no competitors, and the customers are served by only one firm (Scherer, 2015). Importantly, there are no alternatives to the products of a monopoly firm. Also, there are no closely related goods that can fulfill the intended desires. The firm has control over inputs and production; thus, it can decide to alter the prices anytime. A “pure monopoly” is a situation whereby the firm has protection from any new players due to the barriers that exist in the industry. However, pure monopoly is not possible in a real life condition, but several firms may come together to agree on the level of outputs and prices of their products. In that case, strict barriers are created that inhibit other players from entering the market.
Oligopoly
Scherer (2015) defines oligopoly as a market that has few firms whereby the action of one player affects the competitor. Thus, the players are interdependent. Entering in an oligopoly market is not simple which justifies the existence of only a few firms. All the players are always keen on the actions of the competitor since a single move can adversely affect the profit of the other companies. Customers have a choice to shop in a store that offers its products at satisfying prices.
Monopolistic competition
In a monopolistic competition setting, numerous companies sell differentiated goods, but the goods are alternatives (Selim, 2006). This market is characterized by many buyers who purchase products according to their tastes and preferences. The products are offered at various prices since they are not similar. A market is monopolistic when the involved firms produce similar goods that are close substitutes. Enterprises enter this market due to the attractive profit margin. Besides, all the players seek to maximize their profits since they can regulate prices and levels of production. In this market, a single player can’t be a price taker. Thus, the demand curve is not entirely flat.
Perfect competition
Perfect competition is a case whereby only a few enterprises exist in the industry, but none of the firms can control the prices. In this market structure, the prices are regulated by demand and supply (McDERMOTT, 2015). A market with perfect competition structure bears these characteristic: numerous firms that offer a homogenous product to many customers, it is simple to enter and leave the market, and customers have the right information about the products and prices. In this market structure, the companies are price takers. However, McDERMOTT (2015) holds that a perfect competition market is not possible in the real life situation.
Market structures that are present in the city
The Local Water Service Company is the sole provider of piped drinking water in my town. The company enjoys monopoly since there are no close substitutes, and closest companies offer bottled water which can't replace piped water. Innovation and technology can’t create alternatives since the company is a public utility. Additionally, the Water Company enjoys both legal and natural barriers that prevent other players from entering the firm. Legal barriers include license and exclusive right to supply piped water to the local. Natural barriers include the ability to provide water to the whole community at a lower price. Ideally, if there were two water companies the prices would be high and negatively affect the locals. Since the Water Company is the only provider of piped water, it is regulated by the local government. The price of water in our city remains constant for long since the firm has control over the prices. We only choose the quantity of water to purchase since there are no alternatives.
Self-selection stores are a good example of oligopoly in my local city. Entering in this industry is not simple, and the players have multiple commercials promoting similar products but at varying prices. When one store changes its price, the others also revise their catalogs to avoiding losing customers.
The restaurant industry is an ideal example of monopolistic competition in my local city. Getting a permit to launch the business is simple, and the customer loyalty determines success. Most restaurants sell similar foods differentiated by name, favor, quantity or mode of packaging. These products are offered at varying prices, so customers have a choice of where to purchase. Importantly, profit potential in the restaurant industry is very high which lures more players to join the market.
Farming is an ideal example of perfect competition in my location. Even though there are few players in the agriculture industry, none can control the price. In fact, the prices fluctuate according to the level of harvest of that particular season. If one farmer raises the price of his/her products such as wheat, tomatoes, carrots or maize, customers tend to purchase from the competitor. The population in my local city is always informed about the existing agricultural products and the speculated prices, so they don’t just purchase from a single seller.
3. Impacts of barriers on long-run profitability of the companies
High entry hurdles exist only in oligopoly and monopoly. Ideally, entering a monopolistic competition and perfect competitive market is easy. In long-run, the profitability oligopoly and monopoly differ substantially.
Long run profitability of a monopoly
Figure 1: Mankiw & Taylor, 2006
Example: Water Supply Company. Since there are high entry barriers to the water supply industry, the sole firm will enjoy supernormal profits in the long-run. Although the water company may experience losses due to providing water cheaply, increased purchased from the locals will raise the prices. Also, the firm may decide to lower the prices, even more, to ensure more purchases from the consumers. Even losses that are incurred in the short-run may not affect the company. Also, it may decide to increase the prices in the future. However, the profitability solely lies on the amount of water purchased. Several factors will ensure continued monopoly of the water company
Oligopoly
In an oligopoly market, there are only a few firms and high profitability may be realized in the short term. However, McEachern, (2016) notes that in the long-run, profits tend to reduce due to several factors such as entry of new firms or expansion of the existing companies. Nevertheless, if factors remain constant, the enterprises in an oligopoly market setting will realize continuous profits.
4. Competitive pressures in industries that have strict entry barriers
Entering a monopoly market is tough due to barriers such as natural and legal controls. Other obstacles include patent, cost advantage and pricing (Rogers, 1999). Mostly, this industry is given its monopoly power by the government. In this market structure, there is no any form of competition since the supplier is one. Additionally, the lack of close substitutes and alternatives justifies the lack of competition in this market structure.
In an oligopoly industry, the existing barriers include licenses, associate patent, technological costs, and economies of scale. Essentially, the aspects of oligopoly market structure may have remarkable barriers to entry since the product is similar. The competition in this market structure may be due to some firms lowering their prices to suit the demand curve. Nevertheless, conflicts arising due to contracts agreement may be challenging to solve and may consequently impact the pricing and revenue of the affected firms.
In a monopolistic market structure, a player can enter or leave without incurring any cost. Thus, many companies may come into the industry with a “unique” product as they strive to make profits. Also, this kind of market structure is very profitable. Hence, the openness of the market creates high competition intensity. When numerous firms enter the industry, the players are forced to lower prices and use branding to heighten the competition.
In a perfect competition market structure, such as the example of farming in this paper, there are no high entry barriers. Farmers can decide to enter or leave the market as they wish. The farmers sell similar products, meaning that buyers can choose to buy from a particular seller. Competition in this market structure arises when one player decides to lower his/her prices below the others. In such a situation, the individual seller will enjoy more sells since the other players may not necessarily lower their prices. However, this economic model is simply an economic simplification and can’t exist in the real life.
5. Price elasticity of demand
Monopoly
The monopoly’s demand curve reflects the level of market demand (Dana, 2001). The curve slopes downwards towards the right. Importantly the MC of a monopoly market lies in the demand curve due to loss of income from products that are sold at low prices with a goal of controlling demand. However, in an elastic point of view, the low prices are mainly meant to raise gross revenue because cheap products attract high number customers. Conversely, in inelastic point of view, lowering prices leads to the decline of gross income (Dana, 2001). If a monopoly wants to maximize profits, it won’t run its operations in the inelastic part of the demand curve since, at this point, it is possible to raise gross income by increasing the prices and manufacturing few units.
Oligopoly
Figure 2: Tisdell & Hartley, 2008
Price can seem stable in an oligopoly market over a long time. In an oligopoly market, the demand forms a kinked curve. As shown in figure 2 there seems to be an elasticity of demand since the company’s prices remain the same over a long time. However, there may be a slightly inelastic demand under the kink since the other companies implement same price cut. Thus, the best opportunity for oligopoly firms is to do production at the equilibrium position, and the kink spot. However, figure 2 represents a theoretical model that has not been proved yet.
Monopolistic competition
The structure of a monopolistic competition may not appear efficient in some industries. The output charges prices that exceed marginal cost, thus, a company maximizes profit when MR = MC. The MC curve of the firm slopes downwards, meaning that the enterprise is charging a higher price than the in MC. In the case of a monopolistic competition that possesses a monopoly, at the profit maximization level, it will realize a gross loss of customer surplus. Additionally, a monopolistic firm runs with surfeit capacity, meaning that the company’s maximization of output is lower compared to the output at the minimum production.
Perfect competition
In the short term, a player can realize profits in a perfect competition market. Nevertheless, in the long run, it’s difficult to maintain the profit. Entry of new players or growth of the existing actors in the industry leads to a downward shift of demand curve, and this affects all players. Hence, prices are lowered, which consequently reduces the income of the firms, meaning that only average profits will be realized.
6. Impacts of the government activities on the market structures
Although the government may initiate monopoly by entrusting the supply of public utilities to a single firm, it also controls the particular company’s operation. The government seeks to prevent the company from exploiting consumers through high prices or low-quality goods. Additionally, the government may introduce strict requirements such as licensing process, limiting the supply of the required raw materials or technology that prohibits other firms from entering the industry.
The government is much involved in oligopoly market structure with a goal of regulating the existing companies. It offers licenses to ensure the companies undertake their productions legally. Furthermore, the state runs standardization institutions that make sure the products from these businesses meet the required quality and that they are not harmful to the consumers. On the other hand, the government develops the required infrastructure to help the firms in production. However, at times, the government may implement structures or policies that hinder other players from entering the industry. In that case, the existing firms will be immune to competition from new entrants.
The government is very keen on controlling the monopolistic markets to ensure they don’t exploit consumers. Thus, the state always has policies and legislations to regulate firms in this industry. First, the state empathizes on the importance of intellectual property rights and contracts. According to Beardsley (2005) the state can at times stir competition if it enforces absolute laws.
One assumption in a perfect competition industry is that there is no government intervention. However, the state may intervene to ensure a particular market doesn’t become exploitive to the consumers. Also, it may eliminate barriers that prevent other players from entering the market.
7. Effect of international trade on each market structure
Monopoly
International trade doesn’t pose a significant challenge to monopolies since they are immune to competition. Also, monopolies are protected by the government. Thus, the state may be unwilling to offer a license to a foreign company that wants to enter the industry. Importantly, most monopolies such as local phone services and water provision companies are essential and sensitive; thus, they that can’t be left in the hands of foreigners.
Oligopoly
An oligopolistic structure can affect international trade when several firms come together to control the market. Ideally, big companies can act as a cartel and dominate international trade (Ruffin, 2003). Also, the companies may raise prices and control the levels of output. Additionally, cartels can lower supply to increase demand. For instance, the oil industry is dominated by cartels that control the world supply and consequently impact the prices.
Monopolistic competition
Importantly, a monopolistic competition may resemble the aspects of faulty competition in international trade. These include the characteristics of the competitive industry. In this market structure, there are numerous sellers but a single taxpayer.
Perfect competition
Helpman and Krugman (1987), hold that global trade in this market structure is purely under the equilibrium theory with scale economies and imperfect competitive nature. Additionally, for the equilibrium to be real, production and utilities should adhere to convex optimization, there should be stable return, every input is necessary, and preference is homogeneous.
Conclusion
This report has achieved its goal of analyzing various market structures in my local city. It will help the mayor understand the kinds of businesses that exist in the city. The report has insights on monopoly and the barriers involved in this structure, as well as privileges of a monopolistic trade. The oligopoly market structure and how it interacts with customers. Additionally, it has analyzed monopolistic competition, perfect competition structures, and the oligopoly market structure and how it interacts with customers. The findings are that perfect completion market structure doesn’t exist in the real life. Monopoly market mainly consists of companies that offer public utilities. These companies enjoy natural and legal barriers. Further, international trade doesn’t affect monopoly market structure since the government is reluctant on providing licenses to foreign companies. However, international trade impacts oligopoly and monopolist competition negatively since it cause imperfect competition. Regarding long-run profitability, oligopoly will earn ordinary profits in future when other firms enter the market. Conversely, a monopoly company has a potential of making supernormal profits in the long run even if it lowers the price.
References
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Tisdell, C. A., & Hartley, K. (2008). Microeconomic policy: A new perspective. United Kingdom: Edward Elgar Publishing.
