Name 9

Comparingand contrasting different types of market model

Behaviorof different firms is influenced by the type of market structure inwhich they operate. The most common types of market structure includea perfect competition, oligopoly, monopolistic, and monopoly. Eachof the four types of market models has its own characteristics, butsome of them have similar features. The market models can be comparedand contrasted on the basis of five common factors, including thenumber of producers, power of the firm to control prices, type ofproduct, barriers to entry, and non-price competition. This paperwill compare and contrast the four market structures and provide asummary of a current events article that is related to the topic.

Numberof producers

Aperfect competition market is the most appropriate type of model thatbenefits consumers by giving them the greatest surplus. A perfectcompetition exists when there is a large number of small customersand firms in the market. The existence of a large number of smallproducers or sellers implies that none of them can determine theprice of commodities as well as services in the market (Paha 11).Consequently, prices in a perfect market are determined by the forcesof supply and demand. Unlike, the monopoly situations where theseller can set prices, sellers and buyers in a perfect marker arecharacterized as prize takers since they operate with a price that isdetermined by the market forces.

Similarto a perfect competition market, the monopolistic model ischaracterized by the existence of a large number of participants, whoinclude buyers and sellers. Each collection of products is offered bya large number of producers (Boland 144). Additionally, the existenceof a large number of firms creates competition among them, but eachof the firm is able to secure a limited market share.

Oligopolyrefers to a market structure that is characterized by the existenceof a few sellers and relatively large number buyers. A few firms thatoperate in this model are able to control all aspects of the market(Rothschild 300). However, each of the firms takes actions dependingon the decisions made by competitors. For example, a decision tolower the price by one firm forces other sellers to comply bylowering their prices, which is characterized as the theory ofinterdependence. Each firm monitors the actions of the rest of thesellers. This type of interdependence distinguishes the oligopolyfrom all other types of market structure. Although monopolistic andperfect competition structures have many sellers, the level ofinterdependence among them is insignificant.

Monopolyis a unique market structure that is characterized by the existenceof a single seller. The seller has all the powers and resources thatare needed to control all aspects of the market (Simpson 7). Theexistence of a single supplier or seller distinguish a monopoly fromother types of market structure, including perfection competition,oligopoly, and monopolistic structure.

Typeof product

Allsellers in a perfect market offer homogeneous products to theircustomers. The fact that products in the perfect market are identicalmakes it difficult for consumers to differentiate between goods thatare offered by different sellers (Paha 11).

Producersoperating in the monopolistic market have the opportunity to producedifferent commodities, unlike the case of a perfect competition,where all products are homogeneous (Boland 144). However, thedifference between products is quite small. All products retain theirability to play similar functions since their differences exist interms of characteristics only.

Sellersin the oligopoly market can either offer a product that is standardlike the perfect competition market or differentiated as the playersin the monopolistic market do. The opportunity that firms inoligopoly have to differentiate their brands gives them a small roomto expand their market shares by offering brands that are slightlydifferent from those produced by competitors (Rothschild 300).

Thetype of products offered by a monopoly cannot be considered as beingstandard or differentiated brands because there are no alternativesfor comparison. A monopoly offers products that are unique to anextent that no other firm can afford to produce a similar one(Stanislov 36).

Threatof entry

Ina perfect competition, participants are free to enter and leave. Thedecision to enter or leave the perfect competition market isdetermined by profitability, instead of restrictions being imposed inthe form of rules (Paha 15).

Similarto a perfect market situation, firms that operate in a monopolisticmarket are free to leave or enter the market. However, the ease withwhich firms can leave or enter the monopolistic market cannot becompared with a perfect competition situation (Boland 145). Amonopolistic competition ensures that no firm is able to enjoyabnormal profits or incur abnormal losses.

Theexistence of several barriers to entry is one of the key factors thatdifferentiate oligopoly market from a perfect and a monopolisticmarket. In the short-run, the barriers to entry are minimal, but theexisting firms are able to pose barriers that limit the capacity ofnew firms to join the market (Rothschild 301). Some of the keybarriers that exist in the oligopoly include control over criticalinputs, exclusive licenses or patents, a high initial capital,unusual capacity that makes a given industry unattractive topotential investors, and economics of scale that is enjoyed byexisting firms (Rothschild 299).

Theterm “mono” in the monopoly market structure implies that themarket is characterized by a single firm. This type of marketstructure has the most and the strongest barriers to entry comparedto a perfection competition, oligopoly, and monopolistic structure(Simpson 5). In most cases, monopolies prevent the entry of potentialcompetitors by selling their products at the lowest possible prices.This reduces the amount of financial returns that a competitor couldearn by entering the market.

Powerover product prices

Eachof the players (including the sellers and buyers) is small comparedto the overall size of the market. This reduces the capacity of anyone of them to determine prices when acting individually (Paha 12).Consequently, buyers and sellers act as price takers, where they waitfor the market forces to set the price.

Unlikecompanies operating in a perfect competition where they areconsidered as price takers, firms in a monopolistic market areneither price makers nor price takers. They have a partial controlover product prices, which they exercise by differentiating theirbrands (Boland 145). A firm in this market may increase the price ofits brand if it is attractive to more customers.

Theoligopoly situation is characterized by price rigidity, where firmsstick to their prices and only change them when their competitorsincrease or decrease their prices. In most cases, when a firm lowersits price, its competitors are likely to react by a higher deduction.However, competitors may not increase their prices when onecompetitor raises its price with the objective of earning moreprofits (Rothschild 303). Therefore, firms that operate in theoligopoly market can adjust their prices, unlike the price takersthat operate in a perfect market situation.

Inaddition, monopoly is the only type of market structure where aseller has absolute powers to determine prices. This power exceedsthat of the firms that operate in a monopolistic market, where aseller have partial control over different aspects the business(Stanislov 37).

Non-pricecompetition

Participantsin a perfect competition market do not engage in any non-pricecompetition mechanism. For example, advertising in a perfectcompetition is completely unnecessary since buyers can purchase fromany seller and satisfy the same needs (Paha 11).

Inmost cases, firms operating in a monopolistic market achieve somedegree of monopoly by differentiating their prices on the basis onshape, color, brand, and size (Boland 144). The difference existingin between products is quite small, which means that a perfectsubstitution may not be achieved. The ability of the firms todifferentiate their products by adjusting their features is anon-price type of competition that enterprises can use to attract agiven category of consumers, but entities operating in a perfectmarket do not enjoy this benefit.

Advertisingis very critical in the oligopoly market because each firm needs toexpand its market share by attracting some consumers who are servedby competitors. In most cases, organizations under the oligopolyengage in aggressive advertising with the objectives reacting toactions taken by their competitors and avoid losing their marketshare (Rothschild 301). However, a firm that decides to engage inaggressive marketing campaigns faces similar measures that are equalin strength or more aggressive. This is unlike the perfectcompetition market where advertising does bring any benefit whilefirms that attempt to market their products in a monopolistic marketachieve an insignificant increase in the market share.

Althoughmonopolies have absolute control over the entire market, they engagein non-price marketing strategies, such as advertising. Unlike firmsunder the oligopoly and monopolistic situations where marketingactivities aim at taking part of the competitors’ market share,monopolies advertise to reaching new consumers (Simpson 7).

Table1: Comparing and contrasting the perfection competition,monopolistic, oligopoly, and monopoly

Type of market structure

Examples of economic sectors

Number of sellers

Product type

Price control powers

Barriers to market entry

Non-price competition

Perfect competition

Agriculture

Many

Standardized

None

Low

None

Oligopoly

Oil, steel, computers

Few

Differentiated or standardized

Some

High

Production differences and advertising

Monopolistic

Retail business

Many

Differentiated

Some

Low

Differentiation and advertising

Monopoly

Public utilities

One

Unique product

Considerable

Extremely high

Advertising

of the article

Thearticle “U.S. to undermine Russia’s gas monopoly in Europe” waswritten by Nick Cummingham and published on April 22, 2016. Thepurpose of the article was to discuss the efforts made by the U.S. toend the monopoly of LPG gas that Russia has enjoyed in the Europeanmarket for many years. Russia managed to dominate the European marketby selling the natural gas at a low price, which created a barrierfor other producers of natural gas in the world. It is estimated thatthe U.S. intends to export about 32 million tones of gas by the year2020 (Cunningham 1). However, Russia is likely to increase thebarrier by lowering the price further, thus keeping the U.S.exporters off the European market. For example, Russian exportershave the capacity to sell the gas at $ 3.50 MMBtu and make a profit,while American companies need a price of at least $ 4.00 per millionBtu in order to break-even (Cunningham 1). These variations arecaused by differences in the cost of production and cost oftransporting the gas to the European market. Therefore, Russia hasthe capacity to retain its monopoly in the European gas market byselling the commodity at the lowest possible price.

Conclusion

Thefour types of market structures discussed in the present study aredifferentiated on the basis of the number of sellers, powers tocontrol prices, barriers to entry, type of product, and the need touse non-price competition mechanisms to increase the market share. Aperfect competition market is similar to a monopolistic structure interms of the number of sellers and the existence of low barriers toentry. Monopolistic, monopoly, and oligopoly are able to controlprices. Monopoly differs from the rest of the market structures dueto the existence of a single seller and extremely high barriers toentry. Sellers in all market structures, except the perfectcompetition, can use non-price competition mechanisms to expand theirmarket share.

Workscited

Boland,A., Crespi, M., Xia, T. and Silva, J. “Measuring the benefits toadvertising under monopolistic competition”. Journalof Agriculture and Resource Economics37.1 (2012): 144-155. Print.

Cunningham,N. U.S. to undermine Russia’s gas monopoly in Europe. OilPrice.22 April. 2016. Web. 14 July 2016.

Paha,J. Theeconomics of competition (Law).Giessen: Justus-Liebig University, 2013. Print.

Rothschild,K. “Price theory and oligopoly”. TheEconomic Journal57 (2011): 299-320. Print.

Simpson,P. “Two theories of monopoly and competition: Implications andapplications”. Journalof Applied Business and Economics11.2 (2012): 1-13. Print.

Stanislov,S. “Investment characteristics of natural monopoly companies”.Journalof Competitiveness4.1 (2012): 36-43. Print.