Following the American Psychological Association’s Guidelines
DESCRIPTIONS OF THE DIFFERENT MARKET STRUCTURES
Market is a place where the buyers and the suppliers meet. Market is a structure which has a main function of determining an acceptable price for goods and services. The determination of the market price is a result of a bargaining process between the buyers and the sellers (or producers). Bargaining means that the sides of the agreement use their advantages and power to persuade the other side for the price they suggest.
As we know there are some certain types of markets occur in the marketplaces: perfect competition, monopoly, oligopoly, and oligopolistic competition. Perfect competition market has two main features: perfect information and homogeneity in products. Perfect information is the most preeminent feature of the perfect competition markets. Perfect information means that everybody has all the information about products, production costs, substitutes, buyers, sellers, market prices, and all the other market relevant information. When everybody in the market knows everything about the market, then no one can cheat another one or no one can have more power than the other ones. Eventually, perfect information guarantees the perfect competition in the market. As a result of this, everybody concentrates on the quality of their products. Consequently, in the perfect competition market, the society receives the highest possible utility from the resources. Homogeneity in the products means that all the products sold in a market has the same features; therefore, no one can differentiate their products. Differentiating goods and services might cause an imbalance in power among the producers. When everybody knows that all the products are same, then no one can say that their products are better than the others.
Monopoly is a market structure where only one company can sell its products in the market. The two main features of this market type are the followings: closed entry and no close substitute. In monopoly only one company can sell its products because there exists one barrier which blocks other companies. Also there are no close substitute products to the product of the seller in the monopoly market. Until the barrier in the monopoly market ends, the monopolistic company can continue its situation.
Oligopoly is a market which has only a few sellers in the market against a large number of buyers. Oligopoly market type’s two main features are as follows: high entry barriers and interdependence among the few companies in the market. Because of the high entry barriers such as high entry cost or legal regulations, only a few companies can sell their products in the market. In the oligopoly market, the few companies involve in mutual interaction with each other. Sometimes they fight and sometimes they make open or hidden agreements among them to share the market.
Monopolistic competition market is a type of market structure between monopoly and perfect competition markets. There a large number of buyers and sellers in the market. However, the sellers try to differentiate their products from the other products to receive some monopoly power in the market. If the customers believe in a company, then this company becomes more power in the market. To get the monopoly power in the market, the companies spend a lot of effort and resources to differentiate their products in the market. Consequently, the two main aspects of the monopolistic competition are differentiating products and making advertisement and promotion campaigns.
EXAMPLES OF THE MARKET STRUCTURES IN A CITY
Perfect competition is a market type for which it is truly hard to find an example in the real world. It is a desired but an imaginative market type. Theoretically, the perfect competition is used as a measure to check the markets perfectness. Consequently, I cannot give an example of perfect competition market type. From this view, we can say that all the markets in the real world are imperfect competition markets.
As a monopoly market type example, railway and postal services in the developing countries can be given. Railway and postal services have a very high entry cost. Therefore, mostly one company (mostly a state) can produce these services. Also patent regulations can be a good example. When a pharmaceutical company receives the patent of a specific medicine, then no other company can produce it with the same ingredients.
Oligopoly market type is one of the most observed markets. For instance, the cell phone companies, the software companies, and the plane companies can be good examples. In many countries, there only a few cell phone companies operate. Because of high entry and some other legal issues (the companies need to pay a high amount to the governments to get the operation licenses), only a few companies can operate in this markets.
Monopolistic competition can be observed in many markets from chocolate to real estate businesses. As we know that the same kind of houses are sold for different prices. Because the real estate companies spend a lot of effort to persuade their house buyers that their houses are better than the others relatively. When a customer believes that a certain house is better than the others, then this customer might pay a higher price comparatively.
ENTRY BARRIERS AND LONG TERM PROFITS
Entry barrier is a main distinction between perfect competition and imperfect competition market types. The barriers might be built by some companies, or by the laws, or by the nature. If a company can produce something useful for people that no one else can produce or if a company can kill the competition in the market, we have barriers. Sometimes, the nature of the market requires some barriers. For instance, on a top of mountain, a small place does not allow more than a certain number of workplaces like café and restaurant. Legal regulations like patent license or controls allows only a few companies to enter the market.
Barriers cause imperfect competition and only a few companies can operate in the market; however, having barriers do not guarantee high profits in the short run or in the long run. I will analyze four different type of markets in terms of long term profits and entry barriers.
In perfect competition, there is no barrier to enter the market or exit the market. Thus, there exists no difference among the short term or the long term. The profits do not change over time. If any company makes some more profits than the other companies, the others can follow the same way with the company making higher profit. When the other companies start doing this, the high profit opportunity disappears in the market. Consequently, in the long run and in the short the profits are same in the perfect competition market.
In the monopoly market, it is possible to have a high amount profit in the market. However, it is possible to have zero profit or loss. Being the only company in the market does not guarantee a large amount of profit for the monopoly company. The profit making depends on the cost structure of the company. It is also possible that the monopoly company can spend some resource to advertise its products. If the monopoly company can make the buyers addicted to its products, then it might be possible to sell more to them. The barriers exist in the short run and in the long run. Therefore, we can claim that the profit does not change in the short run and in the long run.
Oligopoly market type means a few sellers against a large number of buyers in the market. Oligopoly means a fight between the few companies. They try to make an agreement to share the market. If they can succeed this, the oligopoly market transforms into a kind of monopoly market where the few companies move as if they are one company. In this case, there is no profit difference in the short run and in the long run. However, if there is no agreement reached, then the companies fight each other. The competition might be very tough and the strong companies implement some strategies to kill the other oligopoly companies. In the short run, because of the competition, the profits might be low. After some companies are eliminated in the oligopoly market in the long run, then the companies survived through the oligopoly fight, they can make higher profits. However, the high profit is not guaranteed in this kind of market also.
Monopolistic competition market is a different structure from the other market types. The basic idea in this market is to differentiate the products and services and make the customers believe that some goods are better than the others. When a company can make this, then this company can make high profit in the short run depending on its cost structure. However, to keep the customers believing in you, the company needs to continue spending on the advertisement and promotions. The advertising a promoting policy means a large amount of cost for the company beside the production costs. Therefore, keeping the monopoly power might be possible in the short run for the companies; however, keeping the monopoly power by advertising more in the long run is very expensive. Thus, in the long the monopolistic competition market transforms into a market type close to perfect competition. Consequently, in the short run, the monopolistic competition market is close to monopoly and in the long in becomes close to perfect competition.
COMPETITIVENESS PRESSURES IN A MARKET WITH ENTRY BARRIERS
Entry barrier mean imperfect competition markets. When there exist an entry barrier, then there exists less competition in the market. However, if there exists high profit opportunities in the market, many new companies might be willing to enter the market. These new comers always try to enter the market and incumbent companies try to keep the doors closed to the new comers. Keeping the doors closed mean extra cost for the incumbents. Consequently, we can claim that the cost of keeping the doors of the market closed determines the future of the market. For instance, if the entry barrier exists thanks to a natural reason, then the companies does not need to spend effort for keeping the door closed. However, if the barriers exist because of a strategy that the incumbent firms implement, then it might be hard for them to keep the doors closed. While analyzing a market in terms of entry barriers, one needs to analyze why and how the barrier exists or continues existing. Solving this issue gives important information.
PRICE-DEMAND ELASTICITY IN DIFFERENT MARKET STRUCTURES
Price-demand elasticity is an important indicator for the markets. Price elasticity is a measure for how the customers respond to the changes in the price. In another word, it indicates how much a customer is willing to pay for a good or a service.
In the perfect competition, the price elasticity is stable. Because every change is known by everybody and the customer knows why the price is changed. Thus, the reaction of the customer to the changes in the price does not change. In another word, the customers do not worry about the changes in the prices because they are sure that they will not be cheated.
In the monopoly, the price elasticity might be high or low. It might be high if the customers do not like the product sold in the monopoly market. Thus their price elasticity becomes high. When the price gets higher relatively, then the customers stop using less from the product. However, if the customers feel that they have to use the product in the monopoly market, then they become less sensitive to the price changes and they continue buying same amount from the product.
In the oligopoly market, a similar story to the monopoly market comes true. The oligopoly companies try to make the customers get addicted to their products, or maybe the product is a must for the customers. If the customers truly feel that they need to consume this product, then their price elasticity becomes low. On the other hand, if the customers feel that they do not need this product that much, then their price elasticity becomes high.
In the monopolistic competition market, the companies’ strategies are based on decreasing the price elasticity of the demand. In another word, they advertise and promote their products to increase the addictiveness of their customers to their products. As much as the companies can manage this, then they can keep the price elasticity of demand low. Therefore, the companies need to continue spending effort to keep their customers.
GOVERNMENT’S INFLUENCE ON THE DIFFERENT MARKET STRUCTURES
Government can control the markets by changing legal regulations. Also known, imperfect competition is punished by some legal authorities in many countries. Microsoft case could be given as a good example of this. Government is responsible for guaranteeing some conditions required to provide a suitable environment for the businesses. The imperfect competition is one of the most important problems for many economies.
Governments mostly fight against the non-competitive market conditions. Even every country has a regulation for providing free markets. However, it might not work all the time. There are many issues as reasons to the problem. For instance, some countries would like to have competitive producers in the international markets and they might want to have oligopoly or monopoly in some specific sectors. Another example might be corruption. Most of the underdeveloped and developing countries face corruption problem and corruption might cause any kind of imperfections in the markets. Consequently, government might influence the markets; however, it does not guarantee a perfect competition.
INTERNATIONAL TRADE INFLUENCE ON THE DIFFERENT MARKET STRUCTURES”
International trade influences all the economies. The cheap products invade the economies with high production costs. Thus, if a product is relatively expensive in an economy, the importers find the cheapest product in the world and they import them into their economy. If an economy produces a product with a low cost, then this country might export this product to the other countries.
All the economies would like to have power in the international trade arena. All of them develops some strategies and they might support some productions in their countries. Therefore we can claim that considering the different market types in terms of international trade might be different. Monopoly is considered as bad; however, considering monopoly in terms of international trade may not seem to be so bad because monopoly in an industry inside country might help this country to have power in the international trade arena.
Stiglitz, J. E. and Walsh, C. E. (2007). Economics, W.W. Norton & Company, Inc.,
New York, International Student Edition, 4th edition, 2007.
Varian, H. R. (2010). Intermediate Microeconomics: A Modern Approach, W.W. Norton and
Company/Affiliated East - West Press, 8th edition.