Market structures refer to the number of firms in the market that produce identical goods and services. Market structure heavily influences the supply of different commodities in the market place and consequently the behavior of firms in the industry. Pricing decisions and strategies are very crucial aspects when it comes to market structures since every economic activity in the market is measured as per the price (Bar-Gill, 2012). Before coming into a final decision towards the price to set, stakeholders who are mostly the managers need to critically analyze each market need and the existing conditions and emerging developments. The various market structures and the related pricing strategies can be discussed as follows:
PERFECT COMPETION
In oligopoly markets, there is a conflict between cooperation and self-interest. If all the firms set their targets of outputs to be low, the price is high, but if the firm produces excess outputs the prices will be low and this leads to low profits. Therefore the firms have an incentive to expanding their revenue by output regulation. Oligopoly market structure has a number of characteristics .One if oligopoly characteristics are interdependence, since there are few sellers in the market, when one firm advertises its products in a way that is unique and so appealing in the eyes of the customers, it will automatically take the biggest market share. Another characteristics of is advertising. Under oligopoly a change in firms policy change to has an immediate effect on other firms in the industry. Therefore, the competitor firms remain vigilant about the direction of the firm which in turn thinks of considering a change in the firms’ policies. Thus, advertising is a way in which an oligopoly can prevent itself from being opted out in the market. An oligopolistic firm can come up with the best advertising campaign with the intention of acquiring the biggest market share (Prasad, 2007). Other firms in the industry will automatically resist its defensive advertising. In oligopoly, an important feature is the behavior of the group. There can be small number of the firms but the actions of one firm affect the
Monopoly is derived from the word mono which means single. There are three form of monopoly namely: Pure monopoly in which the industry is the firm itself ,actual monopoly where a firm has less than twenty five percent of the total market share and finally natural monopoly where there is already defined high fixed costs for the natural resources like gas, electricity, water, telecommunications and rail. There are no firms with close substitutes for the commodities that are produced in a monopolistic market structure. The single producer may an individual who owns production of a certain commodity or one partnership or a joint stock company (Metro, 2013). In other words, it is difficult to differentiate between a firm and an industry. Monopolistic market structure gives the owner total control over the supply of a products and services. Since a firm has full control over the supply of the commodity he offers to the market, he has power to determine the price. Therefore, as a single supplier, monopolist may have crown which might not be visible. Also in a monopolistic market structure, the cross elasticity of demand between the product of the monopolist and the product of any other supplier should be very be very little. The single supplier may not affect or be affected by the prices of other economies offered in the economy. Under a pure monopoly where there is only single owner of
with a concentrated market share, an example of an oligopoly today. would be Nike, Reebok and Adidas for shoes. Most industries today are oligopolies, the possible reasons for this. would be that oligopolies in contrast to monopolistic competition. would be able to earn abnormal profits in the long run as well as the short run, as shown in the previous section.
This organization belongs to the oligopoly market structure. The oligopoly market structure involves a few sellers of a standardized or differentiated product, a homogenous oligopoly or a differentiated oligopoly (McConnell, 2004, p. 467). In an oligopolistic market each firm is affected by the decisions of the other firms in the industry in determining their price and output (McConnell, 2005, P.413). Another factor of an oligopolistic market is the conditions of entry. In an oligopoly, there are significant barriers to entry into the market. These barriers exist because in these industries, three or four firms may have sufficient sales to achieve economies of scale, making the smaller firms would not be able to survive against the larger companies that control the industry (McConnell, 2005, p.
In a monopolistic structure, there is a high degree of competition but less perfect competition (Baker College, 2016). An oligopoly market where there is little competition but more than a monopoly. In a monopoly, firms face no competition (Baker College, 2016).
An oligopoly is defined as "a market structure in which only a few sellers offer similar or identical products" (Gans, King and Mankiw 1999, pp.-334). Since there are only a few sellers, the actions of any one firm in an oligopolistic market can have a large impact on the profits of all the other firms. Due to this, all the firms in an oligopolistic market are interdependent on one another. This relationship between the few sellers is what differentiates oligopolies from perfect competition and monopolies. Although firms in oligopolies have competitors, they do not face so much competition that they are price takers (as in perfect competition). Hence, they retain substantial control over the price they charge for their goods (characteristic of monopolies).
Firms may be categorized in a variety of different market structures. Perfectly competitive, monopolistically competitive, oligopolistic,
There are many industries. Economist group them into four market models: 1) pure competition which involves a very large number of firms producing a standardized producer. New firms may enter very easily. 2) Pure monopoly is a market structure in which one firm is the sole seller a product or service like a local electric company. Entry of additional firms is blocked so that one firm is the industry. 3)Monopolistic competition is characterized by a relatively large number of sellers producing differentiated product. 4)Oligopoly involves only a few sellers; this “fewness” means that each firm is affected by the decisions of rival and must take these decisions into account in determining its own price and output. Pure competition assumes that firms and resources are mobile among different kinds of industries.
There are four major market structures; perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition is the market structure in which there are many sellers and buyers, firms produce a homogeneous product, and there is free entry into and exit out of the industry (Amacher & Pate, 2013). A perfect competition is characterized by the fact that homogeneous products are being created. With this being the case consumers have no tendency to buy one product over the other, because they are all the same. Perfect competitions are also set up so that there is companies are free to enter and leave a market as they choose. They are allowed to do with without any type of restriction, from either the government or the other companies. This structure is purely theoretical, and represents and extreme end of the market structure. The opposite end of the market structure from perfect competition is monopoly.
Collusive behaviour exists only within an Oligopoly market structure as a result of the extreme mutual interdependency of firms. Some examples of markets where oligopolies may be found are the Tobacco industry, soft drinks and gas distribution. Parkin et al (2008). An oligopoly is defined as “a few sellers [that] dominate the market… [it] might have dozens or even hundreds of individual firms but most of them are unimportant in the industry; a small number of them…dominate the industry.” California State University Department of Economics. (2014) there are two unique characteristics within oligopoly not witnessed in any other market structure; they are mutual interdependence and repeated interaction. Others include a “high concentration ratio, either a homogenous or differentiated product or both high and low barriers to entry” Dawson, Chris (2013).
Difference Between Oligopoly and Monopolistic Competition An oligopoly market structure is one in which there are a few large producers who are present in the industry and account for most of the output in the industry, there are many small firms but few large. firms dominate and have concentrated market share. Whereas monopolistic competition is a market structure that has a large number of sellers, each of which is relatively small and posse a very small market share. Another feature of an oligopoly is that there are some barriers to entry and exit into the industry.
A Monopoly is a market structure characterised by one firm and many buyers, a lack of substitute products and barriers to entry (Pass et al. 2000). An oligopoly is a market structure characterised by few firms and many buyers, homogenous or differentiated products and also difficult market entry (Pass et al. 2000) an example of an oligopoly would be the fast food industry where there is a few firms such as McDonalds, Burger King and KFC that all compete for a greater market share.
Well the bottom line is that a monopoly is firm that sells almost all the goods or services in a select market. Therefore, without regulations, a company would be able to manipulate the price of their products, because of a lack of competition (Principle of Microeconomics, 2016). Furthermore, if a single company controls the entire market, then there are numerous barriers to entry that discourage competition from entering into it. To truly understand the hold a monopoly firm has on the market; compare the demand curves between a Perfect Competitor and Monopolist firm in Figure
In conclusion, market structure is important because it leads to strategic decision making. Having a working knowledge of market structure impacts decision making because organizations will learn the characteristics of their competition and how the market will response to changes. This report discussed the four different types of market structures: monopoly, oligopoly, monopolistic competition, and pure competition. It went into detail about what each market structure was and gave every day examples of them. Additionally, it will outlined the type of market structure AutoEdge fits into, how that market structure impacts the level of competition, elasticity of demand, price, and position in the industry.
An oligopolistic market has a small number of sellers dominating market share and therefore barriers to entry are high. These sellers are highly competitive and do not act independently of each other. Access to information is limited so sellers can only speculate of their competitor’s actions. Sellers will take advantage of competitor’s price changes in order to increase market share.
With there being several firms for 3 of the markets, the consumer benefits as they can find the cheapest producer, resulting in the producer being at a disadvantage as they could loose business. In a perfect competition market, the firm is unable to choose the price whereas in an oligopoly the price is chosen by the firm this is beneficial for the producer as it increases their profit margins. However, this is harmful for consumers as they will have to pay the higher prices.
Market structure is when an industry has a number of firms making identical products. An industry’s market structure depends on the how many firms are in that in industry and how they will compete in the market. We can focus on those specific factors that will affect how it will change competition and also price. The types of market structure include oligopolies, monopolies, perfect competition and monopolistic competition.