What Does Market Structures Mean?
Market structures refer to the number of organizations operating in a respective market share and other features that affect the competition and trade in the marketplace. In fact, markets are differentiated by the competition level observed between the trading firms. The modern economics differentiates various structures of markets with the distinctions being in the individual characteristics and number of the players. It is worth noting that the market makeup influences the level of efficiency realized and the profits generated. The neoclassical theory divides the market organization into four areas, namely the perfect competition, the monopoly, the oligopoly, and the monopolistic competition markets (Amacher & Pate, 2013). Therefore, revealing the particular features of the markets, analyzing the structural market concepts, including perfect competition, oligopoly, monopoly, and monopolistic completion would be significant in outlining the basics of contemporary market structures.
Definition and Characteristics
The neoclassical economics argues that in a rational setting, a market comprises sellers and potential buyers where their interactions explain trade principles, the demand and supply of tradable goods and services. The knowledge of the levers in demand and supply influences the prices at which the buyers and the sellers could be willing to purchase and sell the items respectively. In fact, the different market structures enumerated have varying features based on the customers’ impact on the process of price formulation, the mechanisms of price determination, similarities, or uniqueness of the product, and the differentiation strategy (Amacher & Pate, 2013). Moreover, the markets differ in the factors that affect the potential player to enter or exit a marketplace.
This market structure features many firms, homogeneous products, freedom of entry, and exit and normal profits. Accordingly, the market configuration has many buyers and sellers with standardized products implying that the goods have close substitutes (Chen & Schwartz, 2013). Besides, the forces of demand and supply take effect in determining the prices of the services and goods in trade. With the market forces of demand and supply influencing the pricing, then the sellers and producers are restrained from setting the market prices. Therefore, in rational circumstances, the buyers are inclined to purchasing more from the firms at low prices with the assumption of perfect information in the market (Chen, & Schwartz, 2013). Examples of firms operating on the principle of the perfect competition structures are bakeries, retail shops, and public transport vehicles.
In this particular market structure, there is high control with only one dominating producer. Therefore, in monopoly, there are many barriers to entry as the sole supplier makes supernormal profits (Askar, 2013). With no close substitutes, the prices of the goods and services are considerably high as set by the producer. Accordingly, the buyers are considered as “the price takers” because they accept the value set by the manufacturers. Indeed, firms become monopoly when they own the only means of production or when they secure the copyright with the government (Askar, 2013). An example of industries where the monopoly market structure is observed is weaponry and the crude oil sector.
The main feature of this kind of market formation is the existence and domination of only a few firms. In essence, the participants form an association through which they work together and implement price controls. However, the players have identical products and target similar market clientele. Accordingly, when one of the players decides to lower the prices, then the other producers follow its steps by lowering the respective prices (Daher, Karam, & Mirman, 2012). Nevertheless, the sellers embrace and exhibit collusive behavior in price determination. An example of an oligopoly market is the cell phone service providers and the automotive manufacturers.
This particular structure exists whenever many firms operate together but with highly differentiated products. In this case, the market has a high degree of freedom in entry or exit, and the players realize normal profits. Therefore, the differentiation aspect enables the individual players to acquire the monopoly status towards the target customers (Daher, Karam, & Mirman, 2012). An example of a monopolistic market structure is in food industries with similar but highly differentiated food products being offered. For example, depending on the target clients and the business location, yogurt sellers set different prices with different packages.
The high barriers to market entry among the market structures have definite effects on the long-term profitability, cost efficiency, survival, and the incentives of the firms to develop close substitutes.
Long Term Profitability
With the limited entry into a market, potential firms are restricted from investing in the market. Such features lead to the development of an oligopoly and a monopoly with only privileged sellers exploiting the benefits of market controls. Indeed, the monopolies have the advantage of controlling the entire marketplace share while the oligopolies influence the larger sizes of the markets. Subsequently, the players obtain comparatively high levels of revenues and profits. In essence, the limited competition in these markets enables the players to set the respective prices way higher than the costs of production, thereby realizing the supernormal profits in the long run (Amacher & Pate, 2013). However, the buyers are limited in options as the operations of the firms enable them to impose restrictions to entry by other players.
Manufacturing firms strive towards lowering the production and marketing costs as much as possible. Accordingly, cost efficiency is pursued through increased production as well as the employment of new technologies (Daher, Karam, & Mirman, 2012). Besides, the firms are forced to impose barriers to new entrants with the motive of having the pool of the buyers to sell. As such, the increased production to meet the high demand in the market ensures that the firms realize efficiency in costing. In essence, the monopolies usually strive to cost efficiencies among the different market structures discussed.
Survival of Inefficient Firms
Often, the survival rate of inefficient firms, especially in the perfectly competitive markets, is considered low or close to none. However, in other markets such as in the monopolies and oligopolies, more attributes enable the players to carry on with operations despite being labeled as inefficient. For example, with low or no new entrants into the market, the players enjoy low competition (Amacher & Pate, 2013). Accordingly, the firms could proceed with production in spite of the inefficiencies as the demand remains high and the consumers are limited in choices. Therefore, the forces of supply and demand could influence the rate of survival for the inefficient firms.
The Incentive of Entrepreneurs to Develop Substitutes
Entrepreneurs find different motives and incentives to enter into a developed market system. However, the entrepreneurs interested in entering into a monopoly and oligopoly market structures lack the motivation to produce substitutes for the already established products (Amacher & Pate, 2013). Thus, the inability to penetrate the market reduces the aptitude of the entrepreneurs to develop similar and competing goods or services. However, with low entry barriers such as in perfect competition structure, entrepreneurs find incentives to develop competing substitutes.
Competitive Pressures Present in Markets with High Barriers to Entry
From the discussion above, the two market structures with the highest levels of barriers to entry are oligopoly and monopoly. On the other hand, it is worth noting that the competitive pressure in markets differs because of the individual characteristics in the industry (Amacher & Pate, 2013). For example, with the monopolies and oligopolies having fewer players and distinct products, their operations are secured from intense competition. However, the case with increased players in the perfect competition and the monopolistic markets, the rivalry level is considerably high; hence, the competitive pressures (Amacher & Pate, 2013). Therefore, with high barriers to entry, firms realize low competitive pressures.
The Preferred Market Structure for Selling Products
In an ideal market situation, the neoclassical economists state that entrepreneurs prefer to operate in markets with low competition. As such, from a subjective position, I could prefer selling my products in a monopoly structure due to the potential of reaping the supernormal profits. Moreover, in the monopoly market structure, I could enjoy being the price setter and market leader. In this case, I consider the monopoly structure ideal for reduced competition and the ability to determine the prices charged. However, the nature of the products can determine the availability of the other factors determining the market to be served.
Preferred Market Structure for Buying Products
By considering the desired selling market, I could prefer to make purchases from a perfectly competitive market. As it is explained in the description of the markets, the perfectly competitive market has many sellers and buyers who have perfect knowledge of the market levers. Therefore, by having such knowledge, I can make the most informed decision through comparison of the quality and prices. Consequently, as a consumer, deciding on the right product in a market where many substitutes and prices are involved ensures high levels of satisfaction. Most importantly, there is an increased competition, thereby making the prices be determined by the forces of demand and supply. Therefore, the prices are fair as compared to the monopoly market structure.
Elastic or Inelastic Products: Market Structure Response to Price Changes
Product sale responds differently to changes in prices in the different market structures. Accordingly, the reaction is considered elastic or inelastic. For the perfect competition, the forces of supply and demand determine prices (Amacher & Pate, 2013). Consequently, the market structure is considered price elastic as the quantities demanded are influenced by the amount of changes imposed. On the other hand, the monopolies have high production rates within the elastic portion of the demand curve. Accordingly, for the firms to maximize the profits, prices are raised for the situations in the inelastic demand (Amacher & Pate, 2013). Conversely, if the prices were raised in the elastic point, then the demand would fall. In the case of an oligopoly, the quantities sold depend on the prices charged by the firm and the adjustment in price made by the competitors. Accordingly, when the prices charged by a competitor are reduced, then the competitive firm would follow the tendency by lowering prices so as not to lose the potential buyers. Thus, the oligopoly market structure is shown to be highly price elastic. On the contrary, the demand for products in monopolistic structures indicates inelasticity to price changes (Amacher & Pate, 2013). With increased awareness of the market issues by the suppliers and the buyers, prices are easily controlled at the firm’s level for the highly differentiated products.
The Role of the Government in the Market Structure
Free market structures do not involve any government interventions in their operations. However, for the controlled markets, the government has a strategic role to play in influencing the prices charged. In this case, the control by authorities comes in to prevent the exploitation of the consumers by traders through regulation of prices and influencing the rates of entry by new players. The government utilizes the instruments of power to ensure that fairness is observed in trading relations between the sellers and the buyers (Amacher & Pate, 2013). For example, the government intervenes in the perfect competition to ensure that prices do not fall below the set price floors in seasons of excessive production (Schmidt, Spann, & Zeithammer, 2014). Therefore, through enforcing price floors and ceilings, the government ensures that price determination by the forces of the market does not negatively affect the sellers or the suppliers. Likewise, the government realizes that in monopoly setup, the traders can exploit the consumers and therefore intervenes through setting ceiling prices. As the result, the sellers are thus restricted from selling at any price above the predefined price rate. However, the government would face strategic challenges in intervening in the pricing mechanisms for the monopolistic market structures (Amacher & Pate, 2013). The explanation is that the products involved in the monopolistic structure are highly differentiated.
How International Trade Affects Each Market Structure
Besides the government’s influence on the market structures, the international trade may also encroach on the operations of the industry. International trade entails the sale and purchase of goods and services from across the borders (Etro, 2014). At times, the firms operating in international markets are highly advantaged than the small startups in local markets. Accordingly, when an international company intervenes in the local market systems, they exploit the generated benefits of market leadership (Schmidt, Spann, & Zeithammer, 2014). In essence, international corporations increase market competition by proposing more substitutes; hence, such structures as the monopolies are destroyed. When the companies start operating in areas where monopolies exist, then a perfect competition arises.
Secondly, the operations of international players in the local markets affect the pricing mechanisms. For instance, due to the advantage of low production costs by international traders, their prices tend to be low. Consequently, the forces of demand and supply initiates lower prices in the perfect competition context that could be undesirable for the local players (Etro, 2014). In extreme cases, the local firms may exit leading to extortion of the buyers through the resultant monopoly status. Therefore, the international trade affects the market structures positively or negatively by altering the nature of operations and the pricing features of the markets.
As it can be confirmed from the above discussion, there are four main market structures according to the neoclassical economics, including the perfect competition, oligopoly, monopoly, and the monopolistic markets. It is worth noting that the differentiating features include the availability of product substitutes, the number of sellers and buyers, the pricing mechanisms, and ease of entry or exit by the trading firms. In fact, the price elasticity of demand and international trade affects the market structures differently. Moreover, the government is shown to have a strategic but a mediated level of intervention into the different structures. Again, the subjective opinion on the market structure to buy or sell depends on the nature of the operations of the individual market structures.
Amacher, R. & Pate, J. (2013). Microeconomics principles & policies. San Diego, CA: Bridgepoint Education, Inc.
Askar, S. S. (2013). On complex dynamics of monopoly market. Economic Modelling, 31, 586-589.
Chen, Y., & Schwartz, M. (2013). Product innovation incentives: monopoly vs. competition. Journal of Economics & Management Strategy, 22(3), 513-528.
Daher, W., Karam, F., & Mirman, L. J. (2012). Insider trading with different market structures. International Review of Economics & Finance, 24, 143-154.
Etro, F. (2014). The theory of endogenous market structures. Journal of Economic Surveys, 28(5), 804-830.
Schmidt, K. M., Spann, M., & Zeithammer, R. (2014). Pay what you want as a marketing strategy in monopolistic and competitive markets. Management Science, 61(6), 1217-1236.