Introduction

Market
structure describes the state of a market in relation to competition.

The collection of factors by
which it is possible to descry between different market structures are: the
interactions of buyers and sellers in the market, the type of products being
traded, how price change as well as the interactions of different levels of
production and trade processes.

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In
that essay we will discuss four main market structures such as perfect
competition, monopolistic competition, oligopoly and monopoly; their advantages
and disadvantages for the market; and the best examples that fits to particular
market structure.

Perfect competition

Perfect
competition is a market structure where many firms offer a homogeneous product.
Because there is freedom of entry and exit and perfect information, firms will
make normal profits and prices will be kept low by competitive pressures
(Pettinger, 2016).

 

Main conditions for perfect competition:

1.     
Very similar products;

2.     
Unlimited number of sellers and buyers of one type of product;

3.     
No monopoly;

4.     
The prices of the products are made by the market, but not by the
government;

5.     
Similar opportunities for all people to start own business from
economical point of view;

6.     
Accessible information in everywhere about prices on the market.
Majority of people know about the prices of products;

7.     
Mobile factors of production, it is easy to open a company or close it
if it is unprofitable;

8.     
Competitors, in general, do not effect on other market players.

Let’s consider some of these points in
details:

1.     
The market is full of small sellers and buyers. This fact creates a
situation for some products that they have so small price that it is almost
equal to the cost price, and companies simply survive;

2.     
There are homogeneous products on the market. Therefore, when buyer is
choosing a seller, he or she looks only on price of goods, but only if sellers
provide the products with the same quality;

3.     
Because of the fact that market is overcrowded and only one type of
product is present on it, neither sellers nor consumers can influence on the
cost of production;

4.     
There are no barriers for opening the company by average citizen. It is
free access to buy materials, register company, rent some place and start work;

5.     
Most people know the approximate or exact price for a particular
product. Since all buyers know the prices of products on the market, they will
choose the better offers, which are based on price.

Advantages of the system:

1.     
Strong market, due to the large number of players on it;

2.     
High level solutions of problems for buyers. Higher competition = higher
level of service and product quality;

3.     
Entrepreneurs can independently choose the type of activity. Government
does not limit them in it;

4.     
Low and stable market price of goods. Buyers are winners.

Disadvantages of the concept:

1.     
This market model provides equal opportunities for all firms, but the
result depends only on themselves.

2.     
The desire to increase income often leads to worsening the environmental
situation and the exhaustion of natural resources;

3.     
A large chance of crowding out small companies from the market because
of the low production costs which are put by large players.

Examples
of perfect competition:

1.     
Food industry: potato,
kebabs, canned products;

2.     
Online stores:
electronics, zoo goods, cosmetics;

3.     
Printing companies,
advertising agencies, small logistics firms (Ezyeducation.co.uk, 2017)

Monopolistic competition

Monopolistic competition is
a market structure in which many firms sell products that are similar but not
identical (Mankiw, 2014).

            In monopolistic competition barriers to entry and exit
are really low and all firms have the same, relatively low degree of market
power; they are all price makers. In the long run, demand is highly elastic,
meaning that it is sensitive to price changes. In the short run, economic
profit is positive, but it approaches zero in the long run. Firms in
monopolistic competition tend to advertise heavily to differentiate their
products from one another (Investopedia.com, c2018).

Just
like in the perfectly competitive market, there are a large number of sellers
and a large enough number of customers so that no individual can affect the
overall market. The monopolistic competitors product is differentiated only
slightly from the products produced by its rivals. That is why the firms
separately do not have the full control over the prices.

If
to consider the fact that the products of different producers are slightly
different and not perfect substitutes to each other, an average costumer can
choose one exact product out of the large number given. If this product is
considered as the best one – a customer can pay a little more for it, but if
the price will be too high in comparison to other products, as far that there
are a lot of substitutes from other producers, a customer can easily switch to
another one.

To
differentiate products, monopolistic competitors use the advertisement, visual
attraction or special distinctive features.

In
monopolistic competition products are different till costumers consider them to
be different, even if there is no actual or visible difference between them.

As in a monopoly, firms in
monopolistic competition are price setters, rather than price takers (Investopedia.com, c2018).

Advantages
of monopolistic competitive market:

1.     
As far as producers try to
do everything to make their product different, this fact can be a reason for
innovations, what is undoubtedly important for the development of the market;

2.     
As it was said before, the
barriers to entry into the monopolistic competitive market are really low, what
can be considered as an advantage as far as bigger number of producers leads to
a bigger number of products suggested to a consumer. In short, consumers have a
choice and they can easily find everything their heart desires.

Disadvantages of
monopolistic competitive market:

1.     
Advertisement used by the
producers can be argued to manipulate and distort what consumers desire, as
well as obviously reducing competition as consumers become captivated over the
perception of differentiation  (Infobarrel.com, 2012);

2.     
Assuming profit
maximization, there is an allocation inefficiency in both the long and the
short term. This is because the price is above the marginal cost in both cases.
In the long run, the company is less inefficient, but still inefficient (Pierce, 2016);

Examples of monopolistic
competitive markets:

1.     
Coffee producers like
Lavazza, Jacobs Monarch, Tchibo;

2.     
Toothbrush producers like
Oral B Laboratories or Colgate.

 ( Rittenberg &
Tregarthen, 2009)

 

Oligopoly

Oligopoly
– a market structure in which only a few sellers offer similar or identical
products. Basically, in an oligopoly there is only a small number of sellers,
so that any individual seller, who is a part of an oligopoly, can affect the
market; Consequently, each firm’s profit depends on the actions it and its
rivals take (Perloff, 2012).

Oligopolists may have
considerable power to fix prices and output; power is concentrated in the hands
of a few firms who can dominate a market to gain excessive supernormal profits;
oligopolistic firms may act independently or may coordinate their actions.

A
group of firms that explicitly agree (collude) to coordinate their activities
is called a cartel. These firms may agree on how much each firm will sell or on
a common price. By cooperating and behaving like a monopoly, the members of a
cartel collectively earn the monopoly profit — the maximum possible profit. In
most developed countries, cartels are generally illegal. If oligopolistic firms
do not collude, they earn lower profits (Perloff, 2012),
because if companies don’t cooperate, if they basically follow their own
self-interest then the best outcome is hard to reach.

Advantages of Oligopoly:

1.      It makes the process of
choosing the product easier for a customer as in the oligopoly situation
companies offer rather similar products. However, it is also easier for the
customer to find the alternative of the product;

2.      As far as it’s impossible
for the producers in oligopoly to set completely different prices, they tend to
differentiate their product from each other in the way of developing the
characteristics, quality, service and uniqueness. The goal is to distinguish
their product from their competitors;

3.      Large firms having strong
hold over the market are able to make huge profits as there are few players in
the market ( Sonkushre, 2016).

Disadvantages of an Oligopoly:

1.      In the situation of small
and weak competition producer will not think about upgrading their products;

2.      New firms cannot enter the
market easily due to various barriers of entry ( Sonkushre, 2016);

3.      It just basically leaves
future users with the problem of small number of variable components for their
choice.

Examples of an Oligopoly:

1.      The laptop computer market
is dominated by companies like HP, Dell, and Apple;

2.      The majority of mobile
phones are produced by Apple, Samsung, and LG;

3.      Also, we can see this type
of thing in markets for cars, air travel, movies, candy, and game  consoles.

(Lyndon , 2017)

 

 

Monopoly

Monopoly is a market structure controlled by one
seller with a good product or service that has no close substitutes.

Basically, monopoly can be described with five
characteristics:

1.      Firms
cannot enter the industry so easily because of huge barriers, that is also a
fundamental cause of monopoly;

2.      There
is only one large firm on the market (basically, the firm is the market);

3.      The
firm sells unique product with no close substitutes;

4.      Monopoly
firms are price makers;

5.      They
have ultimate advantage for existing.

The fundamental cause of monopoly is barriers to
entry: A monopoly remains the only seller in its market because other firms
cannot enter the market and compete with it. Barriers to entry, in turn, have
three main sources (Mankiw, 2014);

1.      Monopoly
resources: A key resource required for production is owned by a single firm.

2.      Government
regulation: The government gives a single firm the exclusive right to produce
some good or service (Mankiw, 2014);

3.      The
production process: A single firm can produce output at a lower cost than can a
larger number of firms (Mankiw, 2014).

Advantages of monopoly:

1.      Under
monopoly, greater output and standardization can lead to lower costs; this, in
turn, can lead to economies of scale and scope, which can be passed on to
costumers in the form of lower priced products. For the companies with high
fixed costs this is extremely important (ex.: steel production or tap water).

2.      Monopoly
companies can make abnormal profit, invest it to different researches, improve
products and lower costs in the long term. As an example, it is important for
pharmaceuticals. Without monopoly power
that a patent gives, there may be less development of medical drugs. In
developing drugs, there is a high risk of failure; monopoly profits give a firm
greater confidence to take risks and fund research which may prove futile (Pettinger,
2016).AP1 KK2 

Disadvantages of
monopoly:

1.      As
monopoly firms are a price maker they could price discriminate their consumers
and charge different prices on the same goods and services for different
consumers;

2.      In
case of monopolies in the absence of any competition there is tendency of the
seller to be complacent which in turn leads to seller selling low quality
products and providing poor customer service as customer has no choice because
there are no substitutes due to lack of competition (Parikh, 2015).AP3 KK4 

Monopolies are generally
considered to have disadvantages (higher price, fewer incentives to be
efficient). However, monopolies can benefit from economies of scale (lower
average costs) and have a greater ability to fund research and development. In
certain circumstances, the advantages of monopolies can outweigh their costs (Pettinger,
2016).AP5 KK6 .AP7 KK8 

The
best examples of monopolies are public utilities in markets like electricity,
water and natural gas. It is more efficient to have a monopoly provider rather
than several competing firms. There is no point in having two electricity
cables, water pipes or natural gas pipes running up the same street.

 (Wikipedia, 2008)

 

Conclusion

In
concussion, the perfect competition is very similar to monopolistic
competition. There are many competitive companies, and in fact that the nature
of this competition is different. Perfectly competitive companies provide
identical products and it is hard to be in this kind of market because of the
prices, which usually customers put up on these products, but monopolistic
competitive firms try to survive and develop by differentiating products, which
they produce or sell.

Oligopoly
includes only a few large companies, not one company that control whole market,
comparing with the monopoly. It describes the main difference between these two
types of market. Monopoly has total power over the market, but oligopoly is
not. Oligopoly should cooperate with other big companies to be more profitable
and maximize profits, in the same time when monopoly can put any prices for
products without agreements with other firms.

To
sum everything up, perfect competition, monopolistic competition, oligopoly,
and monopoly are the same and different in something, they have advantages and
disadvantages, and they have their own influence on whole market.

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