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Perfect rivalry, monopolistic competition, oligopoly, and monopoly are the four basic business systems. Perfect market is made up of a vast number of small businesses competing against one another by offering similar goods. In fact, there is no such thing as a perfect market. What we have are economies that imitate optimal markets but lack any of the distinguishing characteristics of such a business system (Carlton & Perloff, 2015). Street food stalls and farm markets are examples of these businesses. Monopolistic completion is a business system that consists of a large number of small markets competing for the selling of differentiated goods. In other words, the services and products offered on this market are similar but are never perfect substitutes. Examples of firms in these industries are consumer electronics, dry cleaners, hair salon, bars and coffee shops.
In the oligopoly market structure, only a few firms that compete with one another, for instance, the motor industry (Carlton & Perloff, 2015). These companies include the Chrysler, GMC, and Ford. Smartphone firms like Apple, HTC, LG, and Samsung among others operate in an oligopoly market. The last form of is monopoly market structure. In this type of market, a single firm controls the entire market. Companies in this market structure mostly operate with exclusive licenses and tariff protection (Kim & Lee, 2016). The providers of gas, electricity, and water constitute firms in a monopoly. They include Exxon Mobil, Devon Energy, and National Grid.
Influence of High Entry Barriers
Profitability of Firms
High entry barriers are associated with firms in oligopoly and the firms in the monopoly. The companies in the oligopoly such as GM and Samsung have an advantage of entry barriers, which limits the number of new firms in the market. Since there are few firms in the marker structure, actions of one firm significantly affect the actions of another business. In the long run, these companies can maintain high abnormal profits and the barriers to entry minimize the number of firms that may arise to capture the excess profits (Gary, Larsen & Markides, 2016). Monopoly market structures are characterized by the high entry barriers exist. Therefore, it becomes almost impossible for the new firm to enter a monopoly market structure even in the long run (Kim & Lee, 2016). Firms such as Exxon Mobil and National Grid can make positive economic profits in the long run as they avoid competition.
Cost efficiencies of the Firms in the Industry
Firms in an oligopoly are cost efficient as they can work together to move prices to desirable amounts that help them to retain a positive economic value. Firms such as Apple and Samsung do their research to find out the prices set by other companies and adjust them accordingly. According to Gary, Larsen, and Markides (2016), firms in oligopoly produce at prices lower than average total cost and hence not productively efficient. Also, they produce at prices where price is lower than marginal cost. As such, they are inefficient regarding production. Thus, they do not produce at minimum cost or right mounts and thus less desirable compared to monopoly. Usually, monopolies set prices that are higher than the marginal costs. Therefore, are inefficient regarding allocation. The firms become productively inefficient when they produce goods lower goods. Also, there are minimal incentives for a monopoly to cut costs. Firms like Exxon Mobil and National Grid can maintain low long-run average costs due to the high degree of economies of scale. Therefore, companies in a monopoly market are cost-efficient under high entry barriers.
Likelihood that some Inefficient Firms will survive
In an oligopoly, the established businesses dominate the market structure. For instance, the case of smartphones companies like HTC, Samsung, Apple, and Oppo. If one of the firms is inefficient, it may not be able to survive the market, as others will dominate the market share. The only way to survive a market is when each of the firms is efficient challenges the other firms in the industry. Firms in a monopoly are likely to survive even with inefficiencies. Firms in a monopoly like Exxon mobile make use of scarce power resources and have power over the same limited resources. Producer rights, tariffs, and patents make it easier for the firm in a monopoly to survive (Kim & Lee, 2016). The firms in a monopoly survive because there are not competitions; there are no substitute goods and the high entry barrier strategy. However, the firms in monopoly need to be innovative in the kind of products and services they offer to consumers. Otherwise, better company with better technology may arise and thus drive out the inefficient firms.
Incentives for entrepreneurs to develop substitutes
The motivation of entrepreneurs to develop substitutes in market structure with high entry barriers firms own resources with no good substitutes. The market structure is characterized by control and ownership of resources. However, the degree differs based on whether they are in a monopoly or an oligopoly. In an oligopoly, it may benefit the firm by a significant margin if it produced substitutes that are innovative. For instance, Samsung will benefit by producing classier phones with improved security features. They will have more sales and more profits for the substitutes. Unfortunately, for a monopoly, it may not be beneficial for entrepreneurs to develop substitutes, as the company is competing with itself. For instance, a power company will use advanced technologies to devise techniques that save on overall power use.
Presence of Competitive Pressures
Competitive pressures exist in an oligopoly, but they do not exist in monopoly (Boddewyn, 2015). A high entry barrier is one of the attributes that define an oligopoly. However, they have some significant firms competing with one another. For instance, there are more firms in the automotive industry like GMC and Ford among others. Here, firms will be required to be innovative to keep up with the changes in the customer preference. Through this, they will be able to maintain a large market share. Monopolistic firms like National Grid are characterized with high entry barriers. New firms into the market are less likely to gain entry. Therefore, the structure does not have competitive pressures. When entrepreneurs are unhappy with the increase in the prices by players operating in an oligopoly, they may not be able to come up with substitute goods or services.
Market Structure Preferable for a Selling a Product
There is a significant level of competitive pressure in an oligopoly market structure. Therefore, a preferred market structure for a sale of a product is a monopoly. With a monopoly, firms have enjoyed high entry barriers that limit competition from rival firms. As such, I plan to have a well-defined product that does not have substitutes in the marker. The product will earn the company the power to control the prices by manipulating the supply. The firm will control a larger marker for the new product. The firm will continue to operate as long as marginal cost is lower than marginal revenue and they do not need to compare prices from other companies. As such, the firms will maximize profits even in the long run.
Market Structure Preferred for Buying Products
Mostly, the price will be a major determinant for good I consume. I would prefer a market structure that offers a wide range of goods sold at the same prices and thus, I would have a wide range of goods to choose from. As such, I would prefer perfect competition market structure when it comes to buying goods. In this market, there are many firms and one seller may not be able to influence the price change other products. The prices in the market are fair to the customers, as they are affected by forces in the market. Also, there is the availability of complete information about products concerning price and technology.
Response of Market Structure to Price Change
Price change in perfect competition model does not affect the firms like street food vendors much as long is resource availability remain affordable or as long the price change is not drastic. The type of products in the model is standardized. This means that some products produced do not affect the prices. The firms_x0092_ marginal revenue is equal to the price making the cost and revenue to be a determinant of whether to produce more of a product.
Price change in monopolistic competition affects the firms as there many sellers and buyers. For instance, when there is a price change in coffee shops and salons, some would still manage to stay in business even with the price change. Firms have some control over price, as they sell highly differentiated products. At certain high prices, the demand becomes elastic while at given low prices, the demand becomes inelastic. Profit is maximized at the point where the marginal cost equals marginal revenue
Firms in an oligopoly respond to changes in price depending on the decisions made by the competing firms. In this model, a small number of competing firms sell differentiated products. Due to interdependency, the price changes by one firm affect the prices change other firms. As such, firms can collude to raise prices. The demand for goods sold in an oligopoly increase in elasticity when price increase while the demand is more inelastic for a reduction in price (Mumbower, Garrow, & Higgins, 2014).
Firms in a monopoly like the power and water supplier companies can change prices for their greater good as they have control over the supply of the product. Firms in this market structure use the level of output to control prices. When prices are higher, they increased the output, and when prices are low, they decrease the output to consumers. As long as the marginal is higher than marginal revenue, firms reduce output and increase prices (Mumbower, Garrow & Higgins, 2014). The largest amount of goods sold in this market is elastic goods as firms have the liberty to choose the prices for the goods. Nevertheless, extreme prices will make the consumer not to purchase the goods.
Role of Government in Affecting Price Changes in the Market
The government does not interfere with the prices in perfectly competitive markets. The market is characterized by the low barrier and low entry. Additionally, the forces of demand and supply determine the price of goods and services. In monopolistic competition, firms set prices without considering the prices of competing firms. For instance, one coffee shop can decide to increase the prices it charges without taking into account the prices of other coffee shops. The government policies, however, ensure that prevalence of the inefficient firms is eliminated and thus keep prices affordable.
Firms in an oligopoly can collude to determine prices of products because they are few in number and interdependent. For instance, if Ford reduced the price a given model of car that acts as a substitute from automobile firms, then, all other firms will reduce the prices to maintain their shares of the market. The reduction in price follows as the price by Ford is used as a standard price. In the processes, firms collude to make the new price and increase profits. The same case applies to the price increase. However, when prices are too high above the competitive levels, then, they are regarded as cartels. The different cartels include bid rigging, market division, and price fixing. The government regularly reviews the business practices that lead to the cartel (Tirole, 2014). As such, government helps in controlling the prices from reaching highly competitive levels.
Government regulation is the leading cause of high government regulations in monopolies. The government set regulations that may limit suppliers within the industry, set tariffs, quotas, and patents and licensing. There are highly bureaucratic procedures that individuals have to follow as to get licenses. The prices can be costly for new firms. The high regulation and policies regarding monopoly are what controls the prices of goods in a monopoly. For instance, a firm may be given patent that offers exclusive rights over certain technology or a new design (Tirole, 2014). As such, the government has control over the prices of water and prices of power in the United States.
Effects of International Trade on the Market Structure
International trade has effects on the different market structures. International trade makes it possible for consumers to access imported products and as well as the sale of merchandise in foreign markets by suppliers. Therefore, firms have to adjust prices to meet the demands of the international market as well as capture a reasonable market share (Chaney, 2014).
For perfect competitive markets, international trade is not a major threat, as it constitutes mainly of perishable goods. For monopolies, competitive market structures, prices of products can be affected a great deal if the prices of the imports of the same goods are cheap. The goods sold in an oligopoly are not necessities. Consumers can order and wait for products from foreign countries as long as they are more affordable compared to those produced within the country (Chaney, 2014). Therefore, firms will adjust prices accordingly. International change may not affect companies in a monopoly, as it constitutes one firm controlling the markers.
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Carlton, D. W., & Perloff, J. M. (2015). Modern industrial organization. Pearson Higher Ed.
Chaney, T. (2014). The network structure of international trade. The American economic review, 104(11), 3600-3634.
Gary, M. S., Larsen, E., & Markides, C. C. (2016). Firm Imitation and Performance: A simulation study. Accessible online: https://www. econbiz. de. Retrieved on, 22.
Kim, S. L., & Lee, S. H. (2016). Optimal two-part tariff licensing strategies of eco-technology (Vol. 2, pp. 217-238). Bentham e Books.
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