Under rational circumstances, economists assume that in a marketplace there must be different buyers and sellers influencing demand and supply of goods and services respectively. In essence, the interactions where the consumers make purchases and the sellers offer the products play a vital role in determining the price of goods. In fact, the market structure is determined by some factors, including the negotiation strength of the buyers and the sellers, the ability to set prices, differentiation capability, and the uniqueness of the products (McEachern, 2011). Besides, the easiness or difficulties in entering and exiting from the market play an immensely important role defining the nature of the market. It is worth noting that there are four possible structures, including perfect competition, oligopoly, monopoly, and monopolistic.
Perfect competition is an extreme form of market structure characterized with relatively many buyers and sellers. As such, the products are in varieties and similar to each other; hence, there are an adequate number of substitutes. For the perfect competition to exist, the barriers to entry for new players are considerably low. Consequently, the price of the products is determined by the forces of supply and demand. Therefore, the producers in such an industry have limited strength in influencing the price of the goods (McEachern, 2011). In this case, if one of the competitors increases the prices, the buyers shift to other substitutes whose prices are considerably favorable.
In a monopoly market, only one player controls the resources and product concerned. It implies that the single entity forms the industry, thus there are no substitutes. Entry in such a market is highly restricted due to considerably high costs as well as the inhibitions in economic, social, or political aspects (McEachern, 2013). Furthermore, the buyers are the price takers, and hence the company makes leverage from the operations. Comparatively, a government with the intention to control a certain industry can form a monopoly structure by establishing its entity and putting in place barriers to new entrants. For instance, the Saudi Arabian government is the sole controller in the oil industry in the country. In other cases, a monopoly can be acquired when an entity secures copyright and patent preventing other parties from entering the market. For example, Pfizer which is a pharmaceutical company has a patent on Viagra production; hence, enjoys the monopoly on the product.
On the other hand, an oligopoly market has a few firms participating in the industry. Indeed, the few players form an association or work together in the interest of controlling price. Just like in Monopoly setup, oligopoly market has a lot of barriers to entry (McEachern, 2011). To start with, the firms have almost identical products and compete with the same buyers. In case one of the players decides to lower the price charged to customers, the interdependent nature of the market will force the other players to lower their prices. For instance, when the demand for a product is 100 units and three players include company A, B, and C producing 50, 25, and 25 units respectively. Consequently, if firm A decides to lower the price, then the company has an opportunity to secure a greater share of the market; hence, companies B and C will be forced to lower their prices.
Lastly, monopolistic competition exists in the presence of a high number of firms producing similar goods (McEachern, 2013). However, the products are unique through differentiation as the players try to attract and retain customers. Due the distinctive nature of the products, each of the market participants acquires monopoly to the loyal customers. It is worth noting that the location and quality of customer service are some of the strategies applied by the firms. For instance, all restaurants serve food items to the customers, but the location of an outlet, the quality of the food served, and customer service makes the difference in the competitive edge acquired.
Accordingly, the barriers to entry make it hard for interested firms to start producing and operating in the industry of interest. Similarly, the inability to enter the market develops due to infrastructural, legal, cost, and brand barriers. For instance, when the cost of entry is high, many potential firms may not afford the price while others are discouraged. Consequently, competition in the market is highly limited leading to the existence of monopoly or oligopoly market structures. However, lesser competition implies that the seller controls the entire market share or that a few firms share the substantial size of the market (McEachern, 2011). The high market share translates into the relatively high amount of revenue and profit reported.
Ideally, the possibility of increased profitability as a result of barriers to entry is brought by the ability to set prices and leverage in the market. Similarly, a monopoly or an oligopoly market player can set prices at a considerably higher level to cover the cost of production and earn a preferred profit margin. Since the price may not decrease the demand, the resultant profit level remains considerably high. Such a company can invest in research, better compensation to the employees, and pay out substantial dividends to the shareholder. In the long run, the company becomes immensely robust and competitive to overcome the potential threats of new entrants. In fact, some of the profits earned can be used in imposing more barriers to assist the firm in maintaining market control; hence, keeping the profit levels steady in the long run.
Again, cost efficiency is the ability to minimize the cost incurred while producing and selling products. In fact, the effectiveness can be achieved in two ways including the economies of scale and adoption of modern technology. Besides, high entry barrier implies that the existing firm(s) will control the hefty portion of the market and hence achieve the economies of scale due to large-scale production that will meet the demand. Additionally, since monopolies and oligopolies make abnormal profits and invest in research and development, it becomes easy to identify and adopt the valuable technology in those market structures. Eventually, such companies maintain a valuable level of cost efficiency.
On the other hand, barriers leading to monopoly can attract a situation where inefficient firms survive. As a result, entrants that would bring in new technology and competition to revive the industry are not allowed. Thus, the existing monopoly continues operating and serving the market at the expense of the consumers where low standard products are offered. Therefore, entrepreneurs interested in entering a monopoly market have relatively low incentives to start producing substitutes to the inefficient firms (McEachern, 2011). In essence, the law, politics, and the cost of entering the market could be unfavorable lowering the enticements of the potential players.
As pointed out, a market with a high level of barriers is possibly a monopoly or oligopoly. To explain, the competitive pressure in the two probable markets differs depending on the nature of each of them. In a monopoly, there are no other players and hence the firm involved no reasonable marketing competition (Amacher & Pate, 2013). Contrary, an oligopoly involves a few but a considerable number of players in the same industry. Hence, the products offered are similar and substitute to each other. In this case, the firms strive to secure an attractive market share to optimize the revenue and profits. As a result, competitive pressure is considerably highly unlike in the monopoly market.
By and large, a seller would be interested in selling his/her products in the market with fewer complications or competitive pressure. Therefore, a monopoly marketplace would be the best structure to operate while vending goods and services. Consequently, it is easy to control the amount such that the price adopted will cover the cost incurred in addition to preferred margin. In particular, the revenue and profit objectives can be realized easily compared to other market orientations. For instance, in perfect competition, the firm is forced to be a price taker because the forces of demand and supply determine the prices charged.
Contrary, as a buyer, I would prefer to make purchases from a perfectly competitive market. Buying of products in such a market comes with a considerable number of benefits. First, the customers have a variety of goods to compare while making the purchase decisions. As a result, the consumer settles for a product whose quality and price are at the preferred level. Therefore, the right quality implies that the satisfaction level is enhanced; hence, the value of money spent is realized (Amacher & Pate, 2013). Additionally, the availability of products in their varieties reduces the threat of shortage or unavailability of the product.
Market products are either elastic or inelastic to changes in the price charged. Each market structure responds to the demand elasticity in the attempt to optimize output and profits earned. In fact, monopolies produce in large quantities within the elastic portion of the demand curve (Amacher & Pate, 2013). Therefore, the players in the market will increase the price if the demand is inelastic to maximize revenue. On the other hand, raising prices for the products in an elastic market would imply that the demand would decline substantially. In a perfectly competitive market, the forces of demand and supply influence the equilibrium price. In fact, the demand for the products is usually price elastic because it changes with the price charged. Besides, under an oligopoly market, the demand for the products is interdependent to the prices charged by the competitors (Amacher & Pate, 2013). Therefore, the decline in the price of one of the players leads to a failure in demand for goods offered by the competitors. Therefore, the other firms are more likely to lower their prices to maintain the demand at the preferred level. In essence, the situation implies that demand in the market structure is price elastic.
Lastly, in a monopolistic competition, there are large numbers of players; hence, the firms have less control in price setting. In fact, a player in the market whose products are not differentiated from the substitutes is exposed to an elastic demand situation where the market sets the appropriate price level. Contrary, a company whose products are highly differentiated gets the opportunity to set prices at a higher level than the market-determined level (Amacher & Pate, 2013). Therefore, the demand curve for such businesses is relatively inelastic to changes in the price level.
In particular, the government as a key player in an economy can use its instruments and powers to influence the ability of each market structure in pricing their products. Therefore, the intervention by the government could be enticed by the need to enhance fairness to the vulnerable buyers or sellers. In fact, the buyers can be exploited through the higher prices while the suppliers can have their merchandise bought at considerably low prices making it hard to survive in the market. Indeed, the regime would be concerned about a situation where local producers are closing down operations due to losses leading to increased unemployment (Davidson & Matusz, 2010). In a monopoly market, the consumers can be exploited through unfair prices. For instance, the government can set a price ceiling such that the sellers do not extend beyond a certain price level.
On the other hand, the problem in a perfect competition is that during the excessive supply, the prices could drop to levels below the cost of production. As a result, the authorities could seek to set a minimum price to ensure that the producers are assured of minimum revenue to continue with the production activities. However, the intervention by the state can affect the liberty required for business to strive for better and more efficient production methods (Davidson & Matusz, 2010). In monopolistic competition, the government may not succeed in controlling the price charged for a particular product because the price difference from one business to the other is determined by the extra cost incurred in differentiating the products from the competitors.
Markedly, the role of international trade in influencing the market structures is indisputable in the contemporary world. Indeed, the trade products from other countries reach the local market leading to the increased number of substitutes. In this regard, a monopoly structure is eliminated as the number of players increase. Consequently, in a case where the market size is wide and there are many local players, the foreign producers considerably. Eventually, a perfect competitive situation is created. With the many buyers and sellers, the market price of the products is determined by the forces of demand and supply.
However, the government of the day would like to control the number of foreign players and a number of products brought into the economy. Therefore, the aim is to ensure that the supply does not move beyond the demand level which would lead to a drastic decline in the equilibrium price. In other cases, international trade can lead to oligopoly setup depending on the behavior or strategy adopted by the multinationals involved. For instance, a few large-scale producers from other countries can enter a market and merge with the local market players where the number of firms in the marketplace declines substantially. Therefore, the new entities are likely to operate in an oligopolistic structure (Amacher & Pate, 2013). Lastly, depending on the nature of the market, the international trade, new technology, and innovative approaches are brought into the local market. As a result, the market players embark on differentiation as a marketing strategy where a monopolistic competitive market structure is established.
As it is evident from the analysis, a market can be defined depending on the nature of the structure in play. In fact, there are four possible structures of a marketplace, including monopoly, perfect competition, oligopoly, and monopolistic competition which arise from the differences in the number of players and the market size. In essence, a perfect competition is highly commendable because it calls for the natural management of resources and price setting. However, the state and international trade can influence the market orientation and the nature of operations.