Market Structures Course name

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Market Structures
The current economic environment is shaped by different market forces
that determine how economic players interact in the market and market
structures. This essay seeks to analyze the local market structures for
the mayor with an aim of creating understanding of the characteristics
of each structure. To achieve this, this essay will describe a real life
market situation in the city and discuss how entry barriers relate to
the long-run profitability of the market players. For the understanding
of the mayor, this paper also seeks to analyze competitive pressures and
price elasticity of demand in each market and discuss the role of the
government in each market structure. Additionally, the effects of
international trade will be discussed to put the mayor’s understanding
at par with the market situation.
Perfect Competition
Perfect competition has it market dominated by the forces of demand and
supply in the determination of prices for goods and services. Through
these forces, the market structure is defined in terms of quantity of
the market volume moved in the market and the solution to any surplus
market volumes (Harris, 2003). Through the forces of demand and supply
the market is made operational in selling and buying since the price
setting mechanism is free from any state control. This makes the market
structure an independent market mechanism that leads to efficiency in
allocation of resources in the related economic structure.
The other unique characteristic is the unlimited number of market
players in terms of buyer and sellers. This characteristic is founded on
the freedom of entry and exit in and out of the market by both buyers
and sellers (Colander, 2008). Therefore, the market process of
determining price and quantity supplied and sold is entirely dominated
by the forces of demand and supply (Hasbrouck, 2007). This therefore
means that one agent cannot influence the activities or operations of
the market. It is because of this feature that makes the players of the
market structure to be price takers and not determinants. Absence or
presence of a single buyer and seller does not create any changes in the
market.
The perfect competition market is also characterized by free access to
market information and knowledge between the buyers and sellers
(Schwartz & Francioni, 2004). This means that everyone is well versed
with market information that is necessary for decision making on buying
and selling of goods and services. Therefore, no party can take
advantage over the or due to the advantage gained by withheld
information. In this market structure, buyers and seller are deemed to
make their buying and selling decisions based on clear understanding of
the products ad the underlying dynamics of price and quantity a dictated
by demand and supply.
Example in the Local City
A perfect example of perfect competition in the city is the market for
margarine. This market fulfills all the characteristics of perfect
competition as described. This is because the price of margarine in the
city is determined by the forces of demand and supply and no arm of the
state is involved in the price mechanism. Additionally, the players in
the market full market access of entry and exit which makes the decision
of one buyer and seller insignificant in the market.
High entry Barriers, Competitive Pressures and Government Role
The market structure does not operate on limitation of exits and
entrants. Therefore there cannot be a considerable entry barrier for
this market structure. Competitive pressures are efficiently controlled
in perfect competition unless limited by the state. If the state
controls new entrants, there will be market inefficiencies that will
affect the pricing mechanism and disrupts buying and selling processes
(Hasbrouck, 2007). This means that long-run profitability of the firms
in the market will be disrupted. Therefore, the role of the government
is that of providing an enabling macroeconomic environment for economic
activities.
Price Elasticity of Demand and International Trade
The price elasticity of demand in this market structure is highly
elastic. This means that a slight increase in price of the products is
highly reflective on the change in quantity supplied or bought in the
market (Schwartz & Francioni, 2004). Similarly, this market is highly
sensitive on the international trade due to the competition on the price
of the same products on the international markets.
Monopolistic Competition
The market structure of a Monopolistic Competition is a unique structure
with several supply players each produce and selling products of
similar nature but slightly differentiated (Colander, 2008). The
differentiation is based on color, size, design, tastes and preferences
among others. Each producer or seller can set his or her own price and
quantity which does not affect the operations of the entire market. It
is a common market platform where many marketers can be regarded to be
monopolistically competitive.
Additionally, Monopolistic Competition can be described as a market
situation that is midway between the levels of perfect competition as
well as monopoly by displaying the properties of the two structures
(Krugman, 2009). Monopolistic Competition structure differs from perfect
competition structure in that suppliers do not produce at the lowest
possible cost. This means that firms operating in this structure are
left with excess capacity for production.
Another main characteristic of monopolistic competition market structure
is the freedom of firms to enter the highly competitive market with
several competing firms offering products that are close to be
substitutes but not perfect substitute (Krugman, 2009). Therefore, the
prices of these products are at the level of average costs which is a
property of perfect competition. In this structure, some consumers have
personal preferences for certain product over other products. This
feature is strong enough to hold them loyal to that product even when
its price is high (Colander, 2008). This aspect gives the producer some
level of market power which is a feature of monopoly market structure.
Example in the Local City
A good example of this market structure is the markets for restaurants
and service industry in the local city. This is because the industry has
characteristics of Monopolistic Competition in that it has a large
number of buyers and sellers. The industry also has non-price difference
that defines product differentiation among the competing products. The
hotel industry players have relatively small market share and are aimed
to maximize profits. At the same time, each restaurant has a limited
ability to influence or shape its output price.
High entry Barriers, competitive pressures and Government Role
There cannot be a significant entry barrier for this market type since
the market structure does not operate on limitation of entrants.
Competitive pressures are efficiently managed in this structure unless
limited by the government or the state (Colander, 2008). This means that
the market will be efficient with self-regulation on entrants. If the
state is involved in limiting new entrants, the resulting market
inefficiencies affects the price mechanism and ends up disrupting the
buying and selling processes. Therefore, long-run profitability of the
firms in the market will be affected. Therefore, for smooth operation of
the market under this structure, the role of the government is a
regulatory role of providing an enabling macroeconomic environment for
economic activities.
Price Elasticity of Demand and International Trade
The price elasticity of demand in this market structure is elastic but
not perfectly elastic. This means that a proportionate increase in price
of the products is reflective on the quantity supplied or bought in the
market (Colander, 2008). At the same time, monopolistic competitive
market is considerably sensitive on the pricing levels on the
international trade. This is because changes in the international prices
of the same products on the local markets will be considered by market
players.
Oligopoly
Oligopoly is the market structure that describes a situation in where
firms are price makers. One of the main characteristic of this market
structure is the existence of few but large firms in the market. Another
main feature is availability of close substitutes to the product being
offered in the market (Harris, 2003). At the same time, the there is
non-price competition like the form that is portrayed in product
differentiation. In this market structure, supernormal profits are
earned in the short run as well as in the long run (Krugman, 2009).
However, these features depend on the number of firms dominating in the
market which are conventionally few. For instance, duopoly is the
oligopolistic market structure involving two large firms competing.
Example in the Local City
A good example of this market structure is the markets for cell phone
service providers in the local city. This is because the industry has
the characteristics of oligopolistic market structure in that it has few
large firms competing. The industry also has non-price difference that
defines product differentiation among the competing products. The cell
phone industry firms have relative market share and are aimed to
maximize profits. At the same time, each competing firm has a
considerable ability to influence or shape its output price which also
affects the market price.
High entry Barriers, Competitive Pressures and Government Role
There is a significant possibility of barriers on entry for this market
type since the market structure operates on limitation of new entrants.
In the long run, the making of profit of a firm or not will depend on
the conditions of entry (Krugman, 2009). But in the long run, there is
likelihood of increasing costs which may reduce profits thus limiting
number of firms present.
Competitive pressures are managed efficiently through market agreements
between the firms in the market structure unless limited by the
government. This means that the market will be efficient with cartels or
self market regulation on entrants (Colander, 2008). The state is highly
involved in limiting new entrants, which makes the market more
efficient. Therefore, long-run profitability of the firms in the market
will be affected. Therefore, for smooth operation of the market the role
of the government is regulatory and provision of macroeconomic
environment.
Price Elasticity of Demand and International Trade
The price elasticity of demand in this market structure is inelastic but
not perfectly inelastic. This means that a proportionate change in price
of the products is not fully reflected on the quantity supplied or
bought in the market (Hasbrouck, 2007). Moreover, monopolistic
competitive market is not sensitive on the price levels at the
international trade. This is because any changes in the international
prices of the same products on the local markets do not affect local
prices by market players.
Monopoly
Monopoly is a market structure that indicates the existence of a market
dominated by a sole seller. This domination may take the market
structure of a single licensed firm, an integrated business
organization, business cartels or it may even be an association firms
that are controlled separately but combine to act together to market
their products and charge common prices (Colander, 2008). The main
characteristic of this structure is that buyers in the entire market
face a single seller. The other characteristic of monopoly is that the
monopolistic firm is able to identify different market segments
according to price elasticity of demand.
Example in the Local City
A good example of monopoly is the markets for electric power and
distribution in the city. This is because the industry has one sole
seller and there is notable absence of any other competing firms.
High entry Barriers, Competitive Pressures and Government Role
There is a total existence of barriers on entry for this market type
since the market structure operates on strict regulation of entrants by
the state. In the long run, making of profit by the firm or not always
depends not on the conditions of entry but on the quantity produced and
supplied (Colander, 2008). There is no competitive pressure as there is
only one seller or organization of sellers united on both pricing and
marketing strategy. Additionally, for smooth operation of the market the
role of the government is regulatory on the macroeconomic environment.
Price Elasticity of Demand and International Trade
The price elasticity of demand in this market structure is inelastic.
Therefore, there is slight change in quantity sold when there is a
change in the price of the product in the market. Additionally, monopoly
market is not sensitive on the price levels at the international trade.
Conclusion
Market structures are differentiated according to the forces that drive
the patterns of buying and selling of goods and services as well as the
decision making process in the market. As a place of contact and
exchange of goods and services, a market is controlled by economic
forces that are determined by the type of market structure that
dominates. Despite having many market orientations in economic terms,
there are three market structures in the city under mayor’s
jurisdiction. These are perfect competition, monopolistic competition,
oligopoly, and monopoly. Each of these structures has unique
characteristics that differentiate it from the other and makes buying
and selling activities possible.
References
Colander, D. (2008). Microeconomics (7th ed.). New York:
McGraw-Hill/Irwin.
Harris, L (2003). Trading & Exchanges: Market Microstructure for
Practitioners. Oxford Press,
Oxford.
Hasbrouck, J (2007). Empirical Market Microstructure. Oxford Press,
Oxford
Krugman, W (2009). Microeconomics (2nd ed.). New York: Worth
Schwartz, A. & Francioni, R (2004). “Equity Markets in Action: The
Fundamentals of Liquidity,
Market Structure & Trading.” John Wiley & Sons
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