Markets have structures, which makes the buyers and sellers aware of the characteristic traits, number of firms, and products along with the entrance and exit strategies. All these aspects adversely affect the pricing and the competition (Elfenbein, Fisman & McManus, 2015). This assignment attempts to discuss the different market structures and way they affect the competitive ambience.
Market structures
Markets are mainly of five types- perfect competition, monopoly, oligopoly, monopolistic competition and monopsony.
Perfect competition is the market structure, where the transactions between the buyers and sellers are high. Presence of infinite number of buyers and sellers reduces the chances of adopting variable pricing method. This is an initiative towards preserving the purchasing power of the buyers. If variable pricing method is adopted, then the buyers and sellers have variable sources for carrying out their transactions (Auer & Schoenle, 2016). In this type of market structure, the products are homogenous. Consciousness towards the transactions enhances the transparency. Typical example of this market structure is the raw materials and the stock exchange. The price of the firms, in this marketing structure, adversely affects the balance between the supply and demand curves.
Here, the marginal revenue is equal to price and the average revenue. In the long run position, prices are intensely competed until the equilibrium is reached for maximizing the profits in the usual manner (Campbell, Goldfarb & Tucker, 2015). Therefore, the news firms entering into the market have less power to utilize the price for selling substitute products. Therefore, the threat of substitute products is less.
In this type of marketing structure, there is only one producer, which nullifies the threat of substitutes. The monopolist is at liberty to charge the price for the product. However, the revenue is limited, which reflects the conscious approach towards regulating the trafficking of the buyers. Typical examples of a natural monopoly are the firms dealing with electricity, natural gas, rail networks among others. Statutory monopolies are the firms possessing the patent rights and authorship of a resource (Holtz-Eakin & Lovel, 2017). Example of this is the drug companies. Artificial monopolies are the firms, which possess explicit information about the transactions, like Organization of Petroleum Exporting Countries. Consistency is maintained in this condition, even if the firms earn supernormal profits. In terms of pricing, difference is there in terms of single priced and price discriminating monopolists.
Multiple producers rule the market in this type of marketing structure. The nature of competition is high, as the producers strive to lure the attention of the buyers towards the products and services. Some of the firms demand high price in order to gain large profit. According to Chung and Chuwonganant, (2014), homogeneity prevails in the products usually; however, it is not one of essential characteristic traits. For example firms dealing in oil have high chances of threat for substitute products. However, car manufacturing firms have fewer chances of substitute products, due to the difference in designs. The firms are required to have accurate information of the products and services. However, it is not one of the essential functions. Prices of the products and services are usually higher, which restricts the entry of the new firms. Collusion of the producers results in a monopolistic condition of the market, which brings to the forefront different shades in the behaviour of the buyers and sellers.
Game theory is one of the important aspects, which helps in understanding the basic dynamics of this market structure. This theory enhances the awareness towards the attempts of the firms towards maximizing the profit margin for attracting the buyers (Cato & Matsumura, 2015). Example can also be cited of the brands like Microsoft, Sony and Nintendo, which have power to dominate the market through the sale of latest and modern technologies to the customers.
This type of marketing structure is a combination of monopoly and perfect competition. Similarity exists with perfect competition in terms of the presence of numerous competitors. This indicates high threats of substitute products. The short run firms rule the market, but they have less authority to exert, which increases the possibility of earning supernormal profits. The demand curve is sloping, however, without any uprisings, as in case of monopolist. The firms compete for earning supernormal profits until incentives are gained for entering into new markets (Bertoletti & Etro, 2016). Typical examples of this marketing structure are service stations and restaurants.
The assumptions related to monopolistic competition are maximization of profit by the firms; free entrance and exit from the market; differentiation within the products sold and specific preference of the customers. Closer observation of the assumptions indicates similarity with that of the structure, perfect competition. However, it is a bit closer to the characteristics of perfect competition. This type of market structure does not prove beneficial in optimal level of output (Campbell, Goldfarb & Tucker, 2015). This is because the firms possess authority to influence the market prices. Example can be cited of the cereal brands. The taste is different, but the aim is to work towards the common goal of helping the customers in starting the day with a perfect breakfast.
In this type of marketing structure, number of suppliers is not the only criteria for differentiating the marketing systems. Number of buyers is also considered for differentiating the market systems. There is only one buyer for a product or service, which enhances their purchasing power. For this, this type of marketing structure is also known as buyer’s monopoly. As per the arguments of Kim and Kim, (2015), this marketing structure occurs when a single firm exerts control over the transaction in the ambience of down market scenario. The firms ruling in the market possess the sole right to purchase multiple sellers. This approach reduces the prices of products and services in accordance to the demands.
When monopsonic situation occurs, sellers indulge in price wars. This is in terms of attracting large number of buyers. This reduces the prices of the products, increasing their quantities. This condition compels them to lose control over the supply and demand (Menkveld, 2014). Technology industry can be one of an efficient example of monopsonic marketing type. Firms like Cisco and Oracle are the only large tech firms in the market, which possesses skilled and efficient engineers. Wages are the criteria, which have intensified the competition between them. Intensifying competition enhances the awareness of the technology firms about maximizing the profit margin through the operational costs (Mortal, Paudel & Silveri, 2017).
I think perfect competition is the best option for selling the products. This is in terms of the presence of large number of buyers and sellers, which adds varieties within the products and services. I feel this variety proves beneficial in terms of enhancing the purchasing power of the buyers. Along with this, there are no risks of an individual firm taking control of the market. According to me, this is an opportunity in terms of achieving firm establishment of the firm within the competitive ambience of the market. Williams, (2016) opines that vastness of the market is assistance in reaching out to different types of buyers.
Liberty to enter and exit the market is advantageous in terms of expanding the scope and arena of the business. As a matter of specification, this liberty would assist in executing the import and export activities. However, conscious approach is needed towards the trade tariffs, which can obstruct the supply chain network. Alliance with the trade union members would be fruitful in terms of dealing with the instances of inflation, high exchange rates and fluctuating prices of the raw materials. I think homogeneity in the products is beneficial in terms of mitigating the threat of substitutes. Huge transactions would be an effective means in maintaining the equilibrium in the price (Chua, Lim & Yeo, 2016).
I would prefer monopolistic competition for buying the products, as I would be able to interact with large number of sellers. Product differentiation would adversely affect my purchasing decision. This is in terms of the increased threat of substitutes. The sellers have equal market share, however, authority lies in the hands of the monopolist. Therefore, if a firm sells quality goods and services, he would be benefitted in terms of establishing his brand within the competitive ambience of the market. The sellers make the most of the incentives to produce high quality goods and services, which increases the production cost. This reflects the true nature of the competition (Brace, 2018).
I would prefer this marketing structure, as the brand loyalty is an essential factor. My loyalty towards the brand enables the seller to set high prices for the products and services. Rational and logical approach towards this direction helps in retaining customers like me. The new firms entering into the market can prove detrimental for the seller to lose their position (Lorenz, 2015). This is a loss for me, as I can be deceived through the tactics of the firms regarding selling substitute products.
In perfect competition, different and huge quantities of transactions bring balance in the price. Decisions for selling the products and services, at high prices than those set by the competitors, bestows few customers on the firms. On the other hand, setting low prices for the products disrupts the equilibrium, compelling the firms to earn less profit. Competition in this marketing structure is the prime factor in maintaining the balance between price and quantity. In terms of graphical projection, firms at equilibrium succeed in making zero economic profit. This indicates that the firms are just pushing themselves for covering the productions costs for venturing into the foreign markets (Loertscher & Reisinger, 2014).
In monopoly, the prices for the products and services are usually high. Lack of competitors does not drive the prices down. High prices are equal to fewer customers for the firms, which generates low revenue. The chances of maximizing the profit margins are also less. This is the case even if the chances of substitutes are less. Monopolistic market structure intensifies the competition in case of low production of the goods and services. High profit earned by the firms restricts the entry of new firms in the market reduces the prices. This indicates large number of customers (Ovodenko, 2016).
In oligopoly, the prices of the products and services are usually devoid of any prospects. Reduction in the prices by a firm results in cutting the prices by the contemporary firms. This creates a condition, where the firm witness reduced profit margin. Therefore, stability prevails in the prices of the products and services, which aligns with the traditional conventions of a competitive market scenario.
As per the arguments of Loertscher and Reisinger, (2014), in monopolistic competition, the firms maintain their individual demand curve. They possess the sole right to set the prices for the products and services. Usually, the price is higher than market price for intensifying the competition with the rivalries. On the other hand, monopsonic market, the buyers possess the right to reduce the price of the product and services below the market price. Service providers agree to enter into negotiation, as the customers are likely to go to a seller, who would accept their offer (Lorenz, 2015).
In oligopolistic market structure, the government plays the role of franchise provider only to few firms, so that they can operate in the market. This restricts the entry of the new firms. Mention can be made of USA, where collusive agreement is legal. However, in some countries, this type of agreement is illegal, where government takes active part in monitoring the transactions. Typical evidence of this lies in the development of competitive policies. In perfect competition market structure, the prices alterations take place rapidly. Liberty to enter and exit the markets nullifies governmental intervention (Brace, 2018). In monopolistic market structure, firms might practice abusive behaviour towards the rivalries. Countering this, there is no scope for competitions, as single seller rules the markets. Governmental intervention is needed in terms of setting regulations for importing and exporting activities. Typical examples include Law of Supply and Demand, Fiscal and Monetary policies. In monopsonic market structure, government takes initiatives towards bringing stability in the labour market (Chua, Lim & Yeo, 2016).
In long run, perfect competition market structure possesses the full liberty to enter and exit the markets. The firms running in a down market scenario are bound to exit the market. Making supernormal profits adds vulnerability to the market position of the firm, making way for the new firms to enter into the market. In monopoly marketing structure, barriers to entry prevail, which reduces the possibility of the new firms entering into the market. In oligopoly market structure, barriers to entry aligns with the usual functionalities, however, it is not a compulsory fact (Williams, 2016). In monopolistic competition, difference prevails in the products and services, which indicates the freedom to enter or exit a particular market. In monopsony market structure, chances of international trade would be high, if equilibrium is maintained between supply and demand.
Conclusion
Different market structures enhance the purchasing power of the buyers and sellers. Perfect competition is completely opposite to monopoly. Price variations in the market structure are crucial in terms of executing the transactions effectively and efficiently. Governmental intervention is necessary in terms of averting the illegal instances and financial instabilities. Adam Smith needs to be credited for his reflections on laissez faire principles, which covers the marketing dynamics. The students intending to pursue higher studies in economics can refer to these principles for enhancing their knowledge on marketing structures. They can also refer to the guidelines provided by Karl Marx and Adam Smith for enriching their literary knowledge about marketing.
References
Auer, R. A., & Schoenle, R. S. (2016). Market structure and exchange rate pass-through. Journal of International Economics, 98, 60-77.
Bertoletti, P., & Etro, F. (2016). Preferences, entry, and market structure. The RAND Journal of Economics, 47(4), 792-821.
Brace, I. (2018). Questionnaire design: How to plan, structure and write survey material for effective market research. Kogan Page Publishers.
Campbell, J., Goldfarb, A., & Tucker, C. (2015). Privacy regulation and market structure. Journal of Economics & Management Strategy, 24(1), 47-73.
Cato, S., & Matsumura, T. (2015). Optimal privatisation and trade policies with endogenous market structure. Economic Record, 91(294), 309-323.
Chua, G. A., Lim, W. S., & Yeo, W. M. (2016). Market structure and the value of overselling under stochastic demands. European Journal of Operational Research, 252(3), 900-909.
Chung, K. H., & Chuwonganant, C. (2014). Uncertainty, market structure, and liquidity. Journal of Financial Economics, 113(3), 476-499.
Elfenbein, D. W., Fisman, R., & McManus, B. (2015). Market structure, reputation, and the value of quality certification. American Economic Journal: Microeconomics, 7(4), 83-108.
Holtz-Eakin, D., & Lovel, M. E. (2017). Technological linkages, market structure, and production policies. In International Economic Integration and Domestic Performance (pp. 59-72).
Kim, W., & Kim, M. (2015). Reference quality-based competitive market structure for innovation driven markets. International Journal of Research in Marketing, 32(3), 284-296.
Loertscher, S., & Reisinger, M. (2014). Market structure and the competitive effects of vertical integration. The RAND Journal of Economics, 45(3), 471-494.
Lorenz, E. (2015). Work organisation, forms of employee learning and labour market structure: accounting for international differences in workplace innovation. Journal of the Knowledge Economy, 6(2), 437-466.
Menkveld, A. J. (2014). High?Frequency Traders and Market Structure. Financial Review, 49(2), 333-344.
Mortal, S., Paudel, S., & Silveri, S. (2017). The Impact of Market Structure on Ex?Dividend Day Stock Price Behavior. Financial Management, 46(4), 1053-1082.
Ovodenko, A. (2016). Governing Oligopolies: Global Regimes and Market Structure. Global Environmental Politics, 16(3), 106-126.
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