Market structures define the different ways companies are structured within the marketplace. The different market structures are based on the characteristics of a market relative to the buyers and sellers and the relationship between them. Competition is another difference between the markets as is the capability of entering and exiting the market.
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Perfect competition is where many firms sell the same product and they have no control over the price of their product/service. They must charge the market price or buyers will buy a lower priced substitute. There are also many buyers of their product. Since there are many buyers and sellers and there is no control over the market price, there is total freedom of entry and exit in this market structure. While there is no true perfect competition, it gives us a point opposite of a monopoly in which to work from. Perfect competition is summed up with six basic assumptions: 1) large number of sellers/producers; 2) larger number of buyers; 3) homogeneous product; 4) free entry into and free exit out of the market; 5) perfect knowledge; and 6) there is easily moving in and out of the industry for buyers and sellers (Amacher & Pate 2013). These six assumptions make these products or services perfect substitutes and the demand curve is perfectly elastic.
Bottled water could be described as close to perfect competition. Bottled water is produced by many companies and they have no control over the price of their product. There are many buyers of their product but if they try to control the price of their product, there are many alternative brands that provide bottled water.
The next market structure is monopolistic competition which can be described as a form of imperfect competition (Wikipedia, 2014). In this market structure, each firm can make decisions about price and output as the products, while similar to other products, has uniqueness about it. That uniqueness may be a specific brand, quality within the product, marketing of the product, etc. This differentiation of the product allows each firm to set their own pricing. There is total freedom to enter or exit this market structure. Restaurants can be classified as monopolistic competition. While restaurants provide the service of preparing food for their customers, each restaurant has their own recipes, name, and atmosphere that can be used to differentiate their brand from another. An example of their uniqueness is two of my favorite restaurant located close to home. Both of these restaurants have a gluten free menu which is very important to me since I have Celiac Disease and having a restaurant that can properly prepare food that I can eat means I will have an enjoyable dining experience. The first restaurant is Wildfire. Their menu consists of steaks, chops and seafood. Since they only have one location in the state and their food is top notch, they have the ability of charging prices that are above the norm. The second restaurant is Biaggi’s Italian Restaurant. Again, because of their menu and atmosphere, they can set their prices. There are other Italian restaurants that have cheaper prices; however, they do not have the atmosphere of Biaggi’s and I am willing to pay the price to know that they can prepare my meal according to my specific needs.
Monopoly is the next market structure. A monopoly is a market structure in which there is only one producer/seller for a product. Monopolies are characterized by a lack of economiccompetitionto produce thegoodorserviceand a lack of viablesubstitute goods (Wikipedia 2014). Another attribute of a monopoly is the difficulty to enter the market due to high costs, governmental regulations, or other impediments. Some monopolies that exist are utility companies and drug companies. Utility companies are regulated by the government and drug companies have patents on certain drugs they develop. During the period in which a drug company’s patent is in force, they are the only one that can produce that drug.
Oligopoly is the last market structure. It is described as the market structure in which a few firms compete imperfectly (Amacher & Pate, 2013). Since there are only a few firms that produce a product, they can have influence over the price charged for the product. Entry into this market is difficult which adds to the ability for companies in this market structure to dictate prices.
Two types of businesses in my local city that relate to me specifically are restaurants and grocery stores. I previously covered the market structure of my two favorite restaurants so I will not go any further into that. There are several grocery stores in the area where we purchase our foods. Again, due to Celiac Disease and health issues my sister has, we shop different stores for different things. As previously specified, gluten free foods are top on our list of foods since gluten is in so many foods. Another requirement is organic foods. In general, I would classify grocery stores as perfect competition in the fact that there are many grocers selling many products to many buyers. The grocery business is very competitive in pricing since they all sell the same brands or brands that are all similar. Many buyers shop grocery stores based on the best prices. We primarily shop at Costco since we can buy in bulk, at discount prices, and buy good quality products. They also carry many gluten free and organic foods which tend to cost much more in a grocery or specialty store. Our second choice is the local Lakewinds store which carries organic foods. Since Costco and Lakewinds are more specialty stores than regular grocery stores, I would be more likely to classify them as monopolistic competition. Costco is a large organization nationwide. They offer good prices yet they set their prices. Some of their prices are not as good as could be found elsewhere, however, the quality they sell makes up for the price. While they usually have lower prices than regular grocery stores, they make up the difference through quantity sold due to their large membership that shop there. I would also consider Lakewinds monopolistic competition too. While we find that they are very competitive pricewise compared to all the grocery stores in the area, they are a specialty store and items like their fresh produce is priced higher, mostly because all of it is organic versus non-organic produce elsewhere.
If a business is making a profit, others may want to enter into that market structure. A monopoly has a high entry barrier to deter others from entering into that market structure. If someone was to enter into it, it would no longer be a monopoly. Since a monopoly has the power over market price, the price can be set to make a profit in the short run but it does not guarantee a profit in the long-run. A good example of this is the US Postal Service. The federal government gives the USPS the right to deliver mail. Even with continual price increases in postal rates, the USPS still runs with a deficit.
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In the Oligopoly market structure, the entry barrier is high, giving businesses the right to dictate prices, however, with a few companies in this structure, there is competition for business. An example of a business in this structure is the airlines. The airlines can be competitive with their prices, but if they raise their prices too much, business will go down. To offset this, airlines compete against other airlines in trying to get you to fly with them. They have different plans to draw you into their airline and charge separately for some services. This allows passengers to select and pay for only the services they want. This keeps the basic price of an airline ticket down. (Chavez 2014)
Amacher, R. & Pate, J. (2013). Microeconomics Principles and Policies. San Diego, CA: Bridgepoint Education, Inc.
Chavez, T, (2014). Analysis of Market Structures, ECO 204 Microeconomics, Ashford University
Wikipedia, 2014, retrieved from: http://en.wikipedia.org/wiki/Monopolistic_competition