Sample Economic Essay Paper on Market structures

Market structures

Introduction

Market structures are composed of buyers and sellers who though the demand and supply that they have, control the prices of products and services in the market. There are different types of market structures depending on the products and services. The different market structures have different entry and exit barriers, and the traders have different levels of capabilities of controlling the price that is offered to the buyers in the market. The entry barriers in the different market structures have an effect on the long run profitability and cost of efficiency of the firms in the market. For market structures that allow traders to have a high level of control in terms of prices offered to buyers, there are high entry barriers.  This paper will look at each of the different market structures, and how entry barriers for specific market structures have an effect on traders and innovative businessmen who would want to come up with alternative products that would meet the demands of the customers in the market.

Perfect competition

Perfect competition occurs when there are several entities in the market but none of them is large enough to dictate the market terms that are used. The use of bitcoins as an online currency is one such example. The bitcoins are on demand but are not widely used especially because legal authorities consider feel that they are mostly used for illegal businesses such as trading of drugs, weapons, and even in funding of terrorist activity. There are several conditions that are observed in perfect competition situations. Individuals that are in the market; both buyers and sellers are assumed to have all the necessary information that is needed in order to trade. They know of the product or service is produced, the different qualities and standards if any, and the price and utility of the products or services that are in the market. In the long run, there traders and buyers can expect reasonable adjustments to allow a convenient production using available factors. One of the biggest advantages of a perfect competition situation is that there are numerous buyers and sellers. Both parties are ready to engage in trade at a certain price (Paal, Smith & Wang, 2013).

A perfect competition market has no entry and exit barriers, and the traders do not have to pay extra costs when they are transacting their products or services. The products that are being offered are uniform for example when comparing the products and services that are on offer form the different traders. If bitcoins were not available, there would be another form of online payment service that would still be anonymous and permit online transactions to take place. There would be no added advantage or disadvantage. Trading with such currency as bitcoins also requires that those who engage in the trade or any other form of perfect competition business be aware of the terms and conditions, and make decisions based on that. International trade would have no major effect on a perfect competition. If the product or service being offered in a country is offered at a price where the profits are minimal for the trader, an international trader would have to sell their product at a higher price because of extra charges incurred such as transport and taxes and tariffs charged before customs clearance. This might lower the demand for such a trader because the clients are already aware that MC=MR and there might be other sellers selling the product or service at a lower price (Dadi, 2010: Dickson, 2013).

Monopolistic competition

Monopolistic competition occurs when there are limited numbers of firms in a market, yet the product or service that they offer cannot be easily substituted. The traders are out to make profits, and they have some form of control over the prices of products or services that are traded in the market. There is minimal entry and exit barriers yet the profits are attractive. A good example of a monopolistic competition firm is a restaurant. A restaurant has relatively minimal entry and exit barriers and it is highly profitable especially if it offers high quality food at affordable process. A restaurant establishment also stands to gain a lot of profit if it has reliable suppliers for its food supplies. A monopolistic type of competition is imperfect because the different traders are differentiated by the quality of products and services that they offer. In the long run, the firms in a monopolistic competition usually get flooded in the market, and most of them use price to attract clients in such a situation. In such a case, the efficiency of running a firm ceases and profits decrease, and the business can only break even (Dadi, 2010).

Monopoly

This is a form of market structure where there is only one business which forms the industry. Most monopolies are owned and controlled by the government such as electricity supply and oil companies. The entry barriers are quite high and they are not limited to economic terms. The entry barriers might be social or political, especially where the resource is of natural such as oil in Saudi Arabia. Where the product or service is essential and is required countrywide such as postal and electricity supply services, a monopoly type of industry seems to be the best solution. Unfortunately, most monopolies are not efficient probably because they feel that their clients have no elsewhere to turn. Monopolies make huge profits because they have control over the prices that are offered to clients for products (Chang, 2011).

Oligopoly

Oligopoly is a market structure whereby there are few firms in an industry. In most cases, the involved firms come together so that they can agree on terms through which they can make use of in order to control the market. In some cases, oligopolies might also collude so as to raise the entry barriers for a new entrant. Telecommunication, motor industry manufacture and airline companies are the best form of example for this type of market structure. T Mobile, Verizon, AT & T and Sprint have the highest number of subscribers in the United States of America. If these four telecommunication companies were to come together ad collude on the prices and other market terms that would lead to price control, such a situation would be referred to as a cartel. On oligopoly is sometimes confused with a monopoly but the latter is just one firm while an oligopoly is composed of a few big firms (Paal, Smith & Wang, 2013). Both types of firms usually require high capital outlay which make it a difficult market to penetrate and compete in. most monopolies and oligopolies also require high level technical knowledge. The products that are produced by oligopolies can be uniform or have some differentiated properties to set them apart from their competition.

Market structure preference and its characteristics

I would prefer selling products in an oligopolistic type of market. This type of market has a few big industries which have control of the prices and conditions under which they offer the product or service. One of the biggest entry barriers in this type of industry is the high technical expertise and capital outlay required. Even though there are a few firms in the market, the different players have to ensure that they offer high quality products and services so that they are competitive when benchmarked against the other few industry players. Unlike a monopoly where the traders can slack and start offering low quality products and services because there is no competition, an oligopoly has no such provision (Chang, 2011). Although business is guaranteed because all users cannot use the services of one trader, the need to stay ahead of the competition, while winning and retaining as many clients as possible, is sufficient motivation to continue being innovative. Most oligopoly organizations have to be careful on the changes that they make geared towards influencing their consumers, because of the possible reactions by the rivals in the industry (Paal, Smith & Wang, 2013). This is one of the major reasons why oligopoly institutions have to consult one another before they make changes that have an impact on the whole industry. As a buyer, I would prefer a perfect market competition industry because the cost of buying items is minimal, and because of the market conditions, the trader is forced to sell the product at minimal price.

Market structures and reactions to changes in prices

The effect of changes in the products or services being offered in the market is dependent on elasticity. Price inelastic products are not affected in terms of demand because of changes in prices. Products such water and salt are essential, and people cannot do without them. Products that have substitutes are likely to have elasticity because clients can use other products in their place. A change in prices in a perfect competition market has no effect on the demand because the supply is also high. There are bound to be traders who would not increase the price because they would make higher profits in selling volumes (Berta, Julien & Tricou, 2011). The oligopoly market structure would engage in price wars if one competitor would lower their price in attempt to try and win clients. But there is minimal likelihood that such a case would occur because the primary goal of firms is to maximize on making profit. The products offered by oligopolistic firms are inelastic. Monopolies offer inelastic products and they are the price makers. There are no substitutes to the products offered by monopolies, and if available, they are usually inefficient in comparison. Fortunately, most monopolies are owned by the government and though the agencies they own are profit making, they set the prices affordably so that the nationals of the country can afford the products and services. Monopolistic competition firms have a degree of control of pricing in the long run, but consumers have the choice of substitutes that are usually widely available.

Government effect on market structure

The government plays a role in the pricing of some elastic products especially those that are used by many people such as oil products. The government can do price regulation or reduce tariffs imposed on the product involved, so that the traders are able to offer consumers the same product at a lower price. In a perfect competition industry, the government has minimal effect and control because of features such as high numbers of suppliers and buyers, no costs are incurred to advertise or transport products, and there are no entry or exit barriers involved. A monopoly is the single supplier of the product or service involved, and there has control over price offered to consumers (Dickson, 2013).

Effect of international trade on market structures

International trade promotes foreign exchange and provides supply of the traded commodity. International trade has different effects on the different market structures. International trade would have minimal effect on a monopoly because the government would not want to competition since it would reduce the profit margins earned. Therefore, the taxes that the firm bringing in the commodity would be charged would be high. International trade into an oligopoly firm in a country would lead to increased advertising by a firm especially of the new firm was very competitive in their entry into the market. International trade would not have an effect on a perfect competition market because the new entrant would not have an effect on the price. There are already many suppliers for the many buyers in the market. A monopolistic market would be affected in the short run by a new entrant, depending on the new terms that were being offered to the consumers (Chang, 2011).

Conclusion

The essay has successfully looked at the different market structures that exist where a set of buyers and sellers create and contribute to changes in demand and supply. Different market structures are determined by how easily the product can be sourced, the nature of the product (elasticity), how much the different firms can influence price and the entry and exit barriers into and out of the market respectively. Commodities such as food items are in high demand and supply, and since they are essential to the buyers, they are willing to pay high prices. However, there are many suppliers which make the products easily available to consumers. There are four categories of market structures that have been considered. A monopoly firm is one that has control of the price of the product or service it offers. A monopoly is the industry since it usually the only one of its kind (Berta, Julien & Tricou, 2011). Good examples include oil and electricity generating companies. Most monopolies are owned by the government of their respective countries. Monopolies are profit making and are efficient both in the short and in the long run. Oligopolies are able to control their prices because they are few in number in their respective industries, and most of the time, they collude against the consumer in setting a price that maximizes profit for them. Perfect competition offers a situation where the traders have no control over the price because there are numerous suppliers available; for the numerous buyers in the market. A monopolistic market structure has low entry and exit barriers, and offers high profits in the short term, but lower profits in the long run; especially after many traders have entered into the market. All the market structures have different parameters that influence them.

References

Berta, N., Julien, L. & Tricou, F. (2011). On Perfect Competition: Definitions, Usages and

Foundations.

Chang, W. (2011). Monopolistic Competition and Product Diversity: Review & extension. State

of University of New York. 26 (5): 879 910. Blackwell Publishing. Journal of Economic Surveys.

Dadi, M. (2010). The perfect competition paradigm: Evolving from its ambiguities. 219–230.

Dickson, A. (2013). The effects of Entry in Bilateral Oligopoly. 4: 283– 303. Game Theory

Journal.

Paal, B., Smith, B. & Wang, K. (2013). Monopoly versus competition in Banking: Some

Implications for Growth and Welfare. 14 (2) 853 –892. Annals of Economics & Finance.