Understanding the Structures Where We Live

Running Head: UNDERSTANDING MARKET STRUCTURES 1

Understanding Market Structures Where We Live

Mark A. Sprague

ECO 204

Ashford University

Prof. Gordon

June 23, 2014

UNDERSTANDING MARKET STRUCTURES 2

Understanding Market Structures Where We Live

There are different market structures that exist in economies today. All of the market

structures are differentiated from one another by certain characteristics that make them all

unique. The basic market structures have differences in the number of seller barriers, and buyer

entry barriers. However all the markets have one main commonalitywhich is to make a profit

influenced by supply and demand in our economy. Economics studieshow these market

structures function related to labor, land, investments, money, and income, production, taxes,

trade both foreign and domestic, and government influences led bydecisions of finances and

political back agendas to determine market decisions for all businesses, individuals and family’s

futures.

Market Structures Defined

Market structure refers to the buyers and sellers and their interaction, competition,

product differentiation, and entry and exit into the market. The differentiation for products


involves service from others to particularly target specific markets in our economy both being

domestic and foreign markets. There is difference in products made or produced by companies

that makes them more appealing to potential customers that can bethe potential for the target

market. The marketing of specific product or service plays a significant role in distinguishing

similar products or service to allow companies to brand themselves for the own companies

hoping to gain popularity for market consideration. When a product or service is different

although it can be very similar to the original product the term unique selling point, or unique

selling proposition is used in the world of business. (Collin & Collin 2006) Positioning or

marketing the brand intention is to market to the consumer’s mindin an attempt to set it aside as

unique to give the seller the appeal as it its positioning statement with hopes of connecting the

product to the company’s brand for selling purposes.

Marketing Differentiation

In economics product differentiation leads to specific market structures and then to

specific competition categories. The specific market system is where buyers and sellers meet is


commonly referred to as trade. According to Diaw & Lessoua (2013)trade for the Unites States

and foreign countries has been the trend and since 2011, 490 agreements were notified to the

World Trade Organization (WTO) which chief purpose was to orchestrate and development of

emerging economies. Much of the trade was thought to deliver and eliminate economic

discrimination among national economies. Trade negotiations with foreign countries

with less developed infrastructures provide impact and influence growth, fairness, and

provide industrialization on a global basis both for political and economic reasons.

Perfect Competition

Perfect competition is sometimes called pure competition which the participants have not

enough power to effect the market to control the prices. Diaw & Lessoua (2013, p. 12)

expressed “Competition: the ways to perfection” has to meet requirement, first listed was

absence of market power. I actually don’t believe that is possible with the reality we live today.

Most people in business today are there to get profit, I believe the perfect competition is simple a

model but actually is not reality in the real world. Moore (1906,p. 211) expressed “perfect


competition is the fundamental hypothesis of economics in the sense that perfect competition is

postulated in nearly every argument as to economic equilibrium.” To summarize my point here is

that in reality there is no perfect competition.

Basic Structural Characteristics

Examples of Perfect Competition

My city where I live there are storage lockers and when the renters don’t pay their

monthly fees, the owners auction off the contents. However for itto be a perfect competition you

would need all potential buyers and sellers present.

Second example of perfect competition is a local flee market where the sellers setup different

goods and services to sell to the buyers who come over the weekend.

Entry or Exit Barriers for Perfect Competition

The first example for perfect competition of auction all potential buyers and sellers are

present so minimum entry and exit barriers exist. The second example I give for the local flee

market have relative few barriers to entry/exit for street vendors.

Explain Competitive Pressures Present in Markets due to High Barriers to Entry


With prices similar for example of food market in my local area due to minimal entry/exit

barriers I see no high barriers to entry/exit. The products from the vendors are similar or would

be considered a homogenous product and service offered, buyers and sellers can switch from one

seller to the other with minimal barriers. However, as we know perfect competition is only a

useful economic simplification of the real world, in reality it does not exist.

Explain Price Elasticity of Demand Effects and its Pricing in Market

According to Hsu (2010, p. 5) “It can be observed that Eq.7 increases with Nk and decreases with ln Pk, meaning that when the market is more competitive, the demand faced by each firm is more elastic. If producers are charging the same price then, as the number of producers goes to?, the elasticity also goes to? The market structure is perfect competition. The elasticity also increases as c increases.” See below solution for elasticity of demand.

Describe How the Role of the Government Affects each Market Structure’s Ability to Price its Products.

Generally governments protect competition by regulations allowingconsumers to exercise choice, and that


they are not coerced or defrauded. (“Government in market,” 2009)

Regulations

Regulations on price, product characteristics, subsidies, taxes, and qualities.

International trade

According to Lutz (2007, p. 1) international trade for perfect competition exist based on

equilibrium theory perspective, models with scale economics and imperfect competition. Also

for the equilibrium the working of standard of international trade: production and utility

functions strictly quasi-concave, returns are constant, all inputs essential, and preferences are

homothetic.

Monopolistic Competition

Hawkins (2014, p. 8) expressed market structure for monopolistic competition to be applicable it

must be supplemented…” Prices of branded goods, and retail and wholesale are typical by the

theory of monopolistic competition. Monopolistic competition is atype of imperfect competition

selling products that are differentiated from one another (e.g. by branding or quality) using price

it’s own pricing. According to Wikipedia (2014) reported the characteristics of monopolistic


competition many producers and many consumers in the market with no business control over

other the market price, consumers perception there are non-price differences among competitors,

there are few barriers to entry/exit, and producers have a degreecontrol over price.

Examples of Monopolistic Competition

Some examples I give for monopolistic competition are products consumers typically use such as

toothpaste and toilet paper. Both toothpaste and toilet paper aregenerally the same but the

differentiation is by texture or softness, packaging, and branding images and advertising.

Entry or Exit Barriers for Competition

There are no enty or exits. Firms entering the market are numerous with “unique” products with

pursuits of profits. Firms with expenses beyond costs that they can’t recoup after an extensive

time period the company will leave the market incurring liquidation. There is assumptions that

firms have startup costs.


According to Wikipedia (2014) In the long run there are no entry and exit costs. There are numerous firms waiting to enter the market, each with their own "unique" product or in pursuit of positive profits. Any firm unable to cover its costs can leave


the market without incurring liquidation costs. This assumption implies that there are low startup costs, no sunk costs and no exit costs.”


According to Wikipedia (2014) “monopolistic competition has inefficiency in its market

structure. The optimum output charges a price that exceeds marginal costs. The MC firm

maximizes profits where marginal revenue = marginal cost. Since the MC firm's demand curve is

downward sloping this means that the firm will be charging a price that exceeds marginal costs.

The monopoly power possessed by a MC firm means that at its profit maximizing level of

production there will be a net loss of consumer (and producer) surplus. The second source of

inefficiency is the fact that MC firms operate with excess capacity. That is, the MC firm's profit

maximizing output is less than the output associated with minimum.”


Petro (1959) expressed government pays special attention to laborand antitrust legistration and

policy. Governments also protect property, and enforces contracts. Petro expressed concern


about government might cause competition by antitrust laws due tolaws being absolute. Petro

went on to say government laws can be vague due to application.

International trade

Wikipedia (2014) expressed monopolistic competition resembled that of imperfect competition

such as type of structure with features of competitive markets. Wikipedia went on to say

imperfect competition includes oligopoly, and monopsony whereby there is many sellers but

only one tax payer.

Oligopoly

Oligopoly refers to an industry dominated by a small number of sellers with market power. They

have the ability to limit or discount competition, and artificially earn excess profits. U. S. cell

phone providers are often cited as a clear example of oligopoly, as the major providers

effectively control the market. They set market prices for their goods or services. Barriers to

entry are high, from capital investments to government permissionto enter a market. They are

notable by profit levels above that driven by competitive models,as they set the market price.

They do have a unique interdependence, market actions taken by one influence actions of


others (T-Mobile recently changed its model to fees for service, with separate pricing for

cellphones. All other major carriers followed suit.).

Examples of Oligopoly

A couple of firms that come to mind or businesses that might fit an oligopoly are steel,

aluminum, cellphone companies (however I see many in the market e.g. Sprint, T-Mobile, Ntelos

etc.) who operate, that could be considered small that might control the market for their product

to have influence over aspects of the market. (“Oligopoly Examples,” 2014)

Entry or Exit Barriers for Oligopoly

Wikipedia (2014) expressed barriers are high, some examples “government licenses, economics

of scale, patents, access to expensive and complex technology, strategic actions by incumbent

firms designed to discourage nascent firms.”


Gwartney, Stroup, Sobel, and Macpherson (2006) expressed characteristics of oligopoly as

having significant barriers due to products that might be identical or differentiated incentives if

they chose to cheat it would probably be by lowering price due to demand curve. However


conflicts related to agreements could be difficult to decipher.


Pettinger (2012) expressed prices can appear stable in oligopolistic markets to explain periods of

price stability. The most predominant being a demand curve model they call “kinked demand

curve”.

If firm increases price, they become uncompetitive If price decreases, they gain market share.

w:


Clayton Act of 1914 gave government authority to limit mergers tolessen competition in an industry is one good example for companies. (“The Role of Government: Regulation of Mergers,” 2010)

International trade

Rufflin (2002) expressed a general theory for trade for oligopolyas being partial equilibrium due

to difficulty with fully explaining how much trade is effected bytariffs, transport costs due to


competitive markets.

Monopoly

Monopoly markets have one provider for a good or service. With no competition to

influence demand or supply, the monopolist offers less goods thandemanded at prices higher

than competitive market forces would dictate. Monopolies are notable for their market power

(can raise prices without losing customers). U. S. drug manufacturers are an example of

monopolies, as they have exclusive rights to sell goods in the US(even though competition

exists in other parts of the world). They have a relatively inelastic demand curve (a 1% increase

in price will likely reduce demand by less than 1%).Examples of Monopoly

Our local cable television service was a monopoly, with the provider paying a license fee

to the cities for the right to offer cable television. Since there was infrastructure cost in wiring

and retransmission, cities were traditionally granting such agreements nationwide. Once satellite

television offered an alternative for localities unserved by cable, it was only a matter of time

before satellite became a competitor to cable. Once Verizon invested in optic fiber delivery

http://www.justanswer.com/essays/8caat-hi-pdtax-assist-next-essay.html


infrastructure, FIOS service became a viable competitor to cable.They now operate as an

oligopoly, with price and service levels influencing the other’s service offerings. It should be

noted that FIOS resells satellite broadcast, and their investmentin infrastructure will likely make

them the premium provider as they develop more markets by adding fiber optic lines

(transmission and internet speeds will be superior).Entry or Exit Barriers for Monopoly

Barriers are designed to block potential entrants from entering ahigh market profitability.

Examples of barriers to entry would be patents, limit pricing, and cost advantages. (“Barriers to entry,” n.d.)


High barriers for a monopoly would be legal restrictions, economics of scale, and control of

essential resource. (“Monopoly and High Barriers to Entry,” n.d.)


“The monopolist's demand curve is the market demand curve. It slopes downward to the

right. The marginal revenue curve for a monopolist will lie inside the demand curve because of

revenue losses from the lower price for units that could have been sold at a higher price.


For the elastic portion of a monopolist's demand curve, a Lower price will increase total revenue.

For the inelastic portion of the monopolist's demand curve, a price reduction will cause total

revenue to decline. A profit-maximizing monopolist will not operate on the inelastic portion of

the demand curve because in that range it is always possible to increase total revenue by raising

the price and producing fewer units.” (“Monopoly and High Barriers to Entry,” n.d.)


Rules by our government seek to control operations through regulation for companies that are

monopolies. One reason is companies can seek to exploit consumersby price controlling the

market as result competition is controlled by one body called Competitive Act of 1998. The

Competitive Act reports referrals to Director of Fair Trading to aid regulators. (“Regulation of

monopoly and competition policy,” n.d.)

International trade

Kujal and Ruiz (2009) expressed monopolies as important related to compete in

differentiated goods market in third country. The article spoke about monopoly could be


positive, negative and governments may choose to have certain policies. Here Kujal and Ruiz

discussed two countries in foreign country based on differentiated goods that they sell and the

marginal costs they both incure.

Identify one real-life example of a market structure in yourlocal city and relate your

example to each of the characteristics of the market. Also Kujal and Ruiz did studies on

unilateral and bilateral studies as result unilateral R&D always increased welfare in free trade.

To conclude, there are few types of market structures in oureconomy today, all of which

would affect us directly or indirectly. The economy structures are connect to each of us either as

buyer or seller. The importance of knowing about these economy structures form our country for

all of our decisions based on our money supply either as business, family, or individuals.

References

Amacher, R., & Pate, J. (2013). Microeconomics Principles and Policies. San Diego, CA:

Bridgepoint Education, Inc.

Arnold, Lutz G. (2007) Existence of Equilibrium in Models of International Tradewith Perfect


or Imperfect Competition. Regensburger Diskussionsbeiträge zur

Wirtschaftswissenschaft 424, Working Paper.

Barriers to entry. (n.d.). Retrieved from

http://www.tutor2u.net/economics/content/topics/monopoly/barriers_to_entry.htm

Berta, N., Julien, L. A., & Tricou, F. (2012). On Perfect Competition: Definitions, Usages and

Foundations. Cahiers D'economie Politique, (63), 7-24.

Collin, F. Collin & S.M.H. H. Collin (2006). In Dictionary of business. Retrieved from

http://search.credoreference.com.proxy-

library.ashford.edu/content/entry/acbbusiness/unique_selling_poin

t_j_nk_seli%C5%8B_ prp%C9%99zi_

%C9%99_n_unique_selling_proposition/0

Diaw, D., & Lessoua, A. (2013). Natural Resources Exports,

Diversification and Economic Growth of CEMAC Countries: On the

Impact of Trade with China. African Development Review/Revue Africaine De

Developpement, 25(2), 189-202.


References

Gwartney, J., Stroup, R., Sobel, R., and Macpherson, D. (2006). Price-Searcher Markets with

High Entry Barriers. Retrieved from

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB8QFj

AA&url=http%3A%2F%2Fwww.grossmont.edu%2Ftoddmyers%2Fpricesearcherhighma

rketbarrier.ppt&ei=fQGpU_jtHuu_sQTssoEw&usg=AFQjCNG5n_zVDvwN4qQ3GNcx5

xWH9ftPZg&bvm=bv.69620078,d.cWc

Government in markets. (2009). Why competition matters – a guide for policy makers.

Retrieved June 23, 2014, from

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/284451/O

FT1113.pdf

Hawkins E. MARKETING AND THE THEORY OF MONOPOLISTIC COMPETITION.






Journal Of Marketing [serial online]. April 1940;4(4):382. Available from: Publisher

Provided Full Text Searching File, Ipswich, MA. Accessed June 23, 2014.

References

Henry L. Moore. (1906). Paradoxes of Competition

The Quarterly Journal of Economics, Vol. 20, No. 2 (Feb., 1906), pp. 211-230

Published by: Oxford University Press

Article Stable Retrieved from http://www.jstor.org/stable/1883653

Hsu, T. (2010). An open economy general equilibrium model with heterogeneous producers, a

homothetic utility function and endogenous elasticity. Review of World Economics,

146(4), 799-818. doi:http://dx.doi.org/10.1007/s10290-010-0071-9

References

Monopoly and High Barriers to Entry. (n.d.). Retrieved from

http://www.angelfire.com/blues/cannonsessays/Microeconmics/Monopoly_and_High_Ba

rriers_to_Entry.htm




Pettinger, T. (2012) Price Stability in Oligopoly. Retrieved from

http://www.economicshelp.org/blog/5597/economics/price-stability-in-oligopoly/

Petro, S. (1959). Competition, Monopoly, and the Role of Government. Retrieved from

http://www.fee.org/the_freeman/detail/competition-monopoly-and-the-role-of-

government

Regulation of monopoly and competition policy. (n.d.). Retrieved from

http://tutor2u.net/economics/content/topics/monopoly/regulation.htm

Rufflin, R. (2002) International Trade Under Oligopoly Conditions. Retrievedfrom

http://www.uh.edu/~rruffin/trade%20under%20oligopoly.pdf

The Role of Government: Regulation of Mergers. (2010). Monopolistic Competition and

Oligopoly. Retrieved from

http://wps.prenhall.com/bp_casefair_econf_7e/30/7934/2031314.cw/index.html

Wikipedia. (2014). Perfect competition. Retrieved from

http://en.wikipedia.org/wiki/Perfect_competition

http://en.wikipedia.org/wiki/Perfect_competition




Wikipedia. (2014). Monopolistic competition. Retrieved from

http://en.wikipedia.org/wiki/Monopolistic_competition

Wikipedia, (2014). Monopolistic competition in international trade. Retrievedfrom

http://en.wikipedia.org/wiki/Monopolistic_competition_in_international_trade

Wikipedia, (2014). Oligopoly. Retrieved from http://en.wikipedia.org/wiki/Oligopoly

References

Your Dictionary, (2014). Oligopoly Examples. Retrieved from

http://examples.yourdictionary.com/oligopoly-examples.html



http://en.wikipedia.org/wiki/Monopolistic_competition

Understanding the Structures Where We Live

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