Abstract
Market Structures are determined by the types of firms that are in them. Different firms have different characteristics that make them ideal for different structures. Several factors come into play n determining which market structure a firm belongs to; a firm without competition and can determine prices and output is automatically in the monopoly market structure. Smaller, multiple and similar firms are in a perfectly competitive market and so on. Different market structures employ different pricing strategies. These market structures and their ideal pricing strategies are described below.
1. Perfect Competition
1.1. Description
This is a market structure which is characterized with numerous firms that are almost equal in strength and none can therefore influence that price that the said market structure. This means that in this market structure the price of products is determined by normal market forces such as demand and supply (Morris & Morris, 1990). A perfect competition market therefore has the following characteristics; a large number of firms that have equal power. Another characteristic of perfectly competitive markets is that there are no barriers of entry or exit. Third, the firms are likely to trade in the same variety of products and the only competition is competition based. When it comes to the prices in this market structure, both companies and the consumers are both price takes and since none of them can determine the price of a
1) An Oligopolistic market structure is a structure where very few large businesses sell a particular standard Good or differentiated Good, and to whose market entry proves difficult. This in turn, gives little control over product pricing because of mutual interdependence (with the exception of collusion among businesses) creating a non-price competition meaning they are the ‘price setters’. A good rule to help classify an
Oligopolistic markets, such as supermarkets or car manufacturing, can be defined in terms of market structure or in terms of market conduct.
The following case study is in regards of economic market structure. In the world of economics all businesses or companies rather, are categorized in certain market structures such as monopoly, oligopoly, or perfect competition, for instance, the market structure for restaurants. Most restaurants are considered monopolistic competition. Being that they all sell and serve food. They have to have instances that vary such as price, logos, servers, locations, décor, types of food, and hospitality.
Two different market structures are monopoly and oligopoly. Oligopoly is a type of monopoly but isn’t exactly the same. Monopoly is the structure that most businesses have which doesn’t have much competition. Oligopoly is a rather difficult business structure for new companies to join.
Individual firm’s market share is tiny compared to the other three market powers, such as monopolistic, oligopoly, and pure monopoly. In a perfect competition system the type of products are homogenous, so each competitor would be selling the same product or service. There is also no barrier to entry so firms can enter and exit the market freely without barriers from regulation or cost.
In order to maximize profits or shareholder wealth, managers must use the information that they have relating to demand and costs in order to determine strategy regarding price and output, and other variables. However, managers must also be aware of the type of market structure in which they operate, since this has important implications for strategy; this applies both to short-run decision making and to long-run
Perfect competition referred as “pure competition,” it’s a type of market structure where there are many buyers and sellers. As a result, if the price of the good or the service is too high or the quality did not meet their expectation, they would have many substitutes. Fontinelle stated that this kind of market structure has to meet 5 criteria; sell similar products making the consumer has more choices, product price could not be controlled by the companies, have small market share, each company would provide information about the product that they are selling and the price that is going to be charged for the buyers, and freedom of entry and exit should be the characterization of the industry (Fontinelle).
In differentiating between market structures one has to compare and contrast public goods, private goods, common resources, and natural monopolies. All of these are major factors that need to be considered.
a) In a perfect competitive market, the sole determinant of pricing is the market demand and the supply curves. A demand curve refers to the total amount that consumers will pay for their products. The supply curve is the total amount that the producers can actually make to supply to the company at the price they can afford or are willing to pay. Another factor in a perfect competitive market structure is the equilibrium price which is basically when the supply of the market meets the market demand of the consumers. Anther unique feature of a perfect competition market is that it is a price taker. In essence, this means that the company doesn’t have any influence on the price. Again, this can only be caused through a market that has a large number of firms with identical products. (Samuelson and Marks, 2010).
Markets differ in a variety of ways including the degree of concentration and competitiveness, a fact which is reflected in the concept of ‘market structure’. Economists’ models link the structural characteristics of a market to the behaviour of firms in that market and subsequently to their performance. A key question therefore is how far a firm’s strategic decisions are shaped by the structure of the market in which it operates.
Perfect competition is the concept that for a given product or service, there are multiple providers that provide a similar product or service. No one company can truly control the market because there are multiple competitors creating the same product for the same price (Samuelson & Marks, 2012). Price cannot be determined by a single company, the overall supply and demand for a product determines the price. In perfect competition perfectly elastic demand exists across competitors. This means that a firm cannot decide to raise prices indiscriminately because their customers will abandon them for their competitors. This also means that every competing firm in the market is a price taker. A price taker has such a small role in the supply and demand of a product that they must accept the price determined by the market. The competitors must sell the product for relatively the same price. Inversely the consumer must accept the price of the product because
Perfect competition: in this competition, no participant dominates the market thus; no specific seller has the power to set the prices of homogeneous goods. This therefore makes the conditions of a perfect competitive market stricter than the rest of the market structures. In this market, AT&T should be willing to sell their services in a certain price that reciprocates to their demand to maximize profits.
In this type of market structure there are many buyers and sellers, and the organization can easily enter and exit the market. Instead prices are determined by market supply and demand. Also, in this type of market, businesses can’t control prices hence the output of the business is controlled deeply in a frame to make profit. Last but not least, in the perfect competition market, consumers are expected to receive goods at a much lower price than in any other market
The organization and characteristics of a specific market where a company operates is referred to as market structure. While markets can basically be classified by their degree of competitiveness and pricing, there are four types of markets i.e. perfect competition, monopolistic competition, monopoly, and oligopoly. In perfect competition markets, many firms are price takers whereas monopolistic competition markets are characterized by the ability of some firms to have market power. In contrast, oligopoly markets are those in which few firms can be price makers while monopoly market is where one firm can be a price maker.
Perfect competition is an idealised market structure theory used in economics to show the market under a high degree of competition given certain conditions. This essay aims to outline the assumptions and distinctive features that form the perfectly competitive model and how this model can be used to explain short term and long term behaviour of a perfectly competitive firm aiming to maximise profits and the implications of enhancing these profits further.