Market Structures

Market Structures

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Market Structures

McConnell and Brue (2004) describe four market structures that companies align themselves with during the course of their corporate lives. This paper will give examples of the four market structures: Pure Competition, Pure Monopoly, Monopolistic Competition and Oligopoly. Companies may move from market structure to market structure over the course of growth and time. This movement between structures may be the result of product changes, introduction of competition or consumer interests. This paper will describe one such company that has made the migration from structure to structure.
According to McConnell and Brue (2004), pure competition is "a very large number of firms producing a standardized product". This is the case with the corn industry. One example of a pure competition corporation is "Farmers Cooperative Association" (FCA). A Farmers' Cooperative Association is a group of farmers, at their convenience, who come together to form a co-op in order to: improve bargaining power; reduce costs; obtain market access or broaden market opportunities and improve product or service quality (Nebraska Department of Agriculture, n.d.) that would normally not be achieved as an individual farmer. In doing so each farmer pays a fee to the Cooperation. The Cooperation itself is normally a non-profit organization in that the profit is realized back to the members supplying the product. Pricing is determined by the Board of Trade and is typically not negotiable. Cooperatives can hold corn at the request of its members in order to obtain a better price. However, in today's farming environment it is common to sell the corn prior to even producing it (Tim Jimenez, personal communication, March 4, 2007). The federal government also controls the price to some extent by offering monies to farmers not to plant or plant more of a product which either raises the prices because supply is not available or lowers the price if there is an abundance of supply. What ever the price is in the end the farmer ends up taking it or referred to as "price takers" (McConnell and Brue, 2004). The farmers individually do not have the volume to effect price, but the group as a whole can have an effect.
In economics, a monopoly is defined as a persistent market situation where there is only one provider of a product or service (Wikipedia, 2007). In a monopoly, a single firm is the sole provider of a product or service. There are no close substitutes, so there is no competition.

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If a monopoly is not protected from competition by law, meaning a legal monopoly, it may be subject to competitive forces that pressure it to keep prices low in order to dissuade competition from arising. An example of this is Macintosh computers. Apple is the only company that manufactures Macintosh system on computers. The Macintosh, or Mac, is a line of personal computers designed, developed, manufactured, and marketed by Apple. Production of the Macintosh is based upon a vertical integration model in that Apple facilitates all aspects of its hardware and creates its own operating system that is pre-installed on all Macintoshes. This is in contrast to PCs pre-installed with Microsoft Windows, where one vendor supplies the operating system and multiple vendors create the hardware, like Dell, HP, and Compaq (Wikipedia, 2007). Macintosh's pricing or non-pricing strategy has reduced them to a small customer base. When looking at the approach Macintosh took as opposed to Microsoft, who charged low prices and sells an enormous amount of software, Macintosh charged higher prices for their product, which resulted in a fewer number of people buying. Back in 1983 Apple may have been selling its computers at an attractive price. But the coming of the IBM clones made Apple's prices look downright hideous. In the face of ever-stronger competition, the company insisted on pricing the Macintosh to maintain at least 50 percent profit margins; its "50-50-50 rule" told managers to keep margins up to maintain the stock price. Customers who paid their own personal money for Macs might be able to justify the high price simply because the computers were fun and easy to use. But business managers who paid Apple prices for any but the most specialized applications, notably graphics-intensive work, were either fiscally irresponsible or just plain dumb. Apple's pricing strategy handed the vast business market to computers running Microsoft operating systems, first DOS, and then Windows (Postrel, 1998).
The insurance industry's market structure is monopolistic. Many companies provide multiple services with products that are differentiated through location. Companies like GEICO use the gecko for easy association with its brand name. The insurance arena has easy market entry and exit and some price control. To maximize profit, insurance firms must juggle three components of monopolistic competition; price, product, and advertising. In specific reference to automobile liability insurance pricing systems, the risk factors that derive price include insurer risk, regulation, geographical region, and investment returns. The rates are comprised of fixed and variable costs. Fixed costs are relatively low because of minimal operational expenses whereas variable costs are high because of the relatively unlimited risks. The insurance firm is pricing for the long run equilibrium output so that price exceeds the minimum average costs for a normal return. As stated above, it's the risks that mandate the average-cost pricing procedures over marginal cost pricing. Utilizing such factors produces economic efficiency. The goods of the insurance agency are sold in the least costly way with price high enough to just cover average total cost and make a normal profit.
An oligopoly is a market structure in which a few firms sell either a standardized or differentiated product into which entry is difficult in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms) and in which there is typically non-price competition (McConnell and Brue, 2004). As the formation of trusts was restricted in the United States, the oligopoly became the most frequent big-business structure. With four or five large firms responsible for most of the output of each industry, evasion of price competition has become almost automatic. If one firm were to lower its prices, it is likely that its competitors will do the same and all will suffer lower profits. On the other hand, it is dangerous for any single firm to increase its prices since the others might hold their prices in order to gain market share. "The safest strategy is to never lower prices and raise prices only when there is abundant evidence that the other firms will also raise prices. When business conditions permit, the price leader will raise prices with the expectation that the others will follow" (Chapter 12: The Arthritic Hand of Oligopoly). The most famous oligopoly throughout the world is the Organization of Petroleum Exporting Countries (OPEC), a cartel set up in 1960 that caused havoc around the world during the 1970's and early 1980's by increasing oil prices, resulting in high inflation and slowed growth. A lot of productive capital equipment and practices that had been practical and feasible at lower oil prices proved to be unprofitable to run at the higher prices and was shut down. Some economists rationalize the turbulent period by theorizing that market forces would have driven up oil prices anyway and that OPEC merely capitalized on the opportunity. Since the early 1980's, OPEC's influence has diminished. Various firms have switched to production methods that need less oil, or less energy cumulatively. Non-OPEC producers such as the United Kingdom have opened new oil fields and some individual members of the cartel have broken ranks by choosing not to restrict their oil production, resulting in lower oil prices (Bishop, 2004).
Simulation Summary
In the University of Phoenix simulation (2007), the company, Quasar experienced all four of the above market structures with their introduction of the "Neutron" optical computer. The first structure exhibited was a monopoly. The monopoly was achieved by limiting the competitor's capability to produce a like product due to the patent being in place. As a result, Quasar became the "price maker" for this type of product. Quasar had to be careful with the pricing on this new technology in that, although at that point in the company's life cycle consumers had no alternative product, inefficiencies could not be overcome by increasing costs to the consumer. As the patent expired, Quasar was faced with a new facet of their business – competition from a like product. This oligopoly phase of Quasar's life cycle proved that being a monopoly does not equip a company with pricing based on the activities of the market. Previously, Quasar had the ‘luxury' of pricing its product based on cost and desired profit. In the oligopoly phase, Quasar had to be cognizant of the presence of a competitor, who was willing to provide its own version of the same product at a lower cost in order to reach higher profit levels. The third phase of Quasar's life cycle was monopolistic competition. There, Quasar attempted to offer a new product and struggled with prioritizing one over the other. In the end, Quasar learned that new products mean new features and possibly new consumers. Buyers are loyal to a point, but eventually will spend their money on the newer and faster product. Quasar learned that investing in and commitment to the newest products is what gain and retain market share, and increase profits. The final phase of Quasar's life cycle is that of pure competition, where Quasar used the opportunity to exploit a component of its existing products. In this portion of the simulation, Quasar learned that the market governs the pricing of the product, and that in order to sell more, sometimes reductions in cost result in higher profits.

Conclusion
Every business falls into a market structure, regardless of the size of the business, or the type of product it produces. Many companies transition through all of the structures as new products mature in development, and other products are researched, and later developed to an even newer product. As new products mature, more competition is introduced as resources become available. With the addition of technology and changes in feature designs, everyday there are doors that are opened for new corporations. Executives must have a firm grasp of their corporations' structures in their given markets. Failing to understand one's market structure could result in the misallocation of labor and financial resources, and cost the organization's market share, profit, and even the life of the business itself. Pricing opportunities change as market structures shift over time. More efficient manners of production need to be investigated in order to survive. New products or services maintain the company's customers and peak potential customers' interests. Companies can be successful in each level of market structure as demonstrated, as long as the corporate decision-makers understand the characteristics of the different types of market structures, and how each might impact their bottom line.


References
Bishop, M. (2004). Essential economics. The Economist. Retrieved on March 4, 2007 from http://www.economist.com/research/Economics/cartel
McConnell, C. and Brue, S. (2004). Economics: principles, problems and policies, 16 ed. McGraw-Hill Companies
Postrel, V. Creative insecurity: the complicated truth behind the rise of Microsoft. Reason Magazine, Retrieved on March 4, 2007, from http://www.reason.com/news/show/30490.html
Charles, R. Pricing problems in automobile insurance: an economic analysis. Journal of Risk and Insurance. Retrieved on March 1, 2007, from EBSCohost database.
Wikipedia. Monopoly. Retrieved on March 4, 2007, from http://en.wikipedia.org/w/index.php?title=Monopoly&redirect=no
Wikipedia. Macintosh. Retrieved on March 4, 2007, from http://en.wikipedia.org/wiki/Apple_Macintosh#Market_share_and_demographics
Nebraska Department of Agriculture, Retrieved on March 2, 2007 from http://www.agr.state.ne.us/pub/apd/coop/coopguide.htm
Chapter 12: The Arthritic Hand of Oligopoly, Retrieved on March 4, 2007 from
http://www.eco.utexas.edu/graduate/Konstantinova/14_Oligopoly.htm
University of Phoenix. (2002). Market structures [computer software].
Retrieved on March 5, 2007, from University of Phoenix, rEsource, Simulation,
MBA/501- Forces Influencing Business in the 21st Century
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