Define the general concept of market structure and analyze the four primary mark

Question

Define the general concept of market structure and analyze the four primary market models (pure competition, monopoly, monopolistic competition, and oligopoly.) Select a specific industry or industries that characterize each model and elaborate on the characteristics and performance of each in demonstrating the qualities representative of their respective markets. (Some examples of distinguishing characteristics may include, number of firms in the industry, existence of industry leadership and percent of market share distribution.)

Explanation / Answer

Market structure is defined by economists as the characteristics of the market. It can be organizational characteristics or competitive characteristics or any other features that can best describe a goods and services market. The major characteristics that economist have focused on in describing the market structures are the nature of competition and the mode of pricing in that market. Market structures can also be described as the number of firms in the market that produce identical goods and services. The market structure has great influence on the behavior of individuals firms in the market. The market structure will affect how firm price their product in the industry .For example in a competitive market the firms are price takers while the industry has the sole duty of price setting. The market structure will affect the supply of different commodity in the market. When the competition is high there is a high supply of commodity as different companies tries to dominate the markets

In a purely competitive market, there are large numbers of firms producing a standardized product. Market prices are determined by consumer demand; no supplier has any influence over the market price, and thus, the suppliers are often referred to as price takers. The primary reason why there are many firms is because there is a low barrier of entry into the business.

The best examples of a purely competitive market are agricultural products, such as corn, wheat, and soybeans.

Monopolistic competition is much like pure competition in that there are many suppliers and the barriers to entry are rather low. However, the suppliers try to achieve some price advantages by differentiating their products from other similar products. Most consumer goods, such as health and beauty aids, fall into this category. Suppliers try to differentiate their product as being better so that they can justify higher prices or to have a larger market share than the competition. Monopolistic competition is only possible, however, when the differentiation is significant or if the suppliers are able to convince consumers that they are significant by using advertising or other methods that would convince consumers of a product's superiority.

For instance, suppliers of toothpaste may try to convince the public that their product makes teeth whiter or helps to prevent cavities or periodontal disease.

An oligopoly is a market dominated by a few suppliers. A high barrier to entry limits the number of suppliers that can compete in the market, so the oligopolistic firms have considerable influence over the market price of their product. However, they must always consider the actions of the other firms in the market when changing prices, because they are certain to respond in a way to neutralize any changes so that they can maintain their market share.

Auto manufacturers are a good example of an oligopoly, because the fixed costs of automobile manufacturing are very high, thus limiting the number of firms that can enter into the market.

A pure monopoly has pricing power within the market. There is only one supplier who has significant market power and determines the price of its product. A pure monopoly faces little competition because of high barriers to entry, such as high initial costs, or because the company has acquired significant market influence through network effects, for instance.

One of the best examples of a pure monopoly is the production of operating systems by Microsoft. Because many computer users have standardized on software products that are compatible with Microsoft's Windows operating system, most of the market is effectively locked in, because the cost of using a different operating system, both in terms of acquiring new software that will be compatible with the new operating system and because the learning curve for new software is steep, people are willing to pay Microsoft's high prices for Windows.

Market Structure No. of Firms Type of product Entry into industry Firms influence over price Perfect competition Many Identical Easy None Monopolistic competition Many Differentiated Easy Moderate Oligopoly Few Either identical or differentiated Difficult Moderate to substantial Monopoly One Unique Impossible Substantial

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