Running head: MARKET STRUCTURES 1

Market Structures

Jennifer L. Comer-

Acker Liberty

University

BUSI 620
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Table of Contents

Abstract................................................................................................................................3

Market Structures.................................................................................................................4

Monopoly.............................................................................................................................4

Example...........................................................................................................................4

Long/Short-Run Analysis............................................................................................4

Monopolistic Competition...................................................................................................5

Example...........................................................................................................................6

Long/Short-Run Analysis............................................................................................6

Perfect Competition.............................................................................................................6

Example...........................................................................................................................7

Long/Short-Run Analysis............................................................................................7

Oligopoly.............................................................................................................................8

Example...........................................................................................................................9

Game Theory...............................................................................................................9

Porter's Strategic Framework 5-forces..................................................................10

Conclusion / Biblical.........................................................................................................11

References..........................................................................................................................12
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Abstract

When understanding microeconomics, the breakdown of market structures is very

important. A market is a group of buyers/sellers, commonly known as brokers, who determine
the price of a product or a collection of products through their contact, both potential and real.
How the market performs will decide how balance is retained, depending on the number of
buyers/sellers, the sizes of the buyers/sellers, the entry and exit barriers. Therefore, the idea of a
market structure is defined as those business features that affect the actions and output of
companies operating in that industry. The key factors that decide competitive dynamics are: the
number of sales participants, both sellers and buyers; their comparative bargaining power in
terms of price-setting ability; the degree of competition between them; the degree of product
differentiation and uniqueness; and the ease of entry and exit from the market or not
[ CITATION Article \l 1033 ].
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Market Structures

The relationship and discrepancies between these dimensions allow many competitive

systems to occur, from which we can illustrate the following: Perfect Competition, Oligopoly

Monopoly, Monopoly Competition, and Game Theory. The purpose of this paper is to define,

provide examples and analysis of the market structures listed above [ CITATION Article \l

1033 ].

Monopoly

A market structure where a single firm is serving the entire market for a good that has

zero close substitutes is considered a monopoly [CITATION Bay17 \p 501 \l 1033 ]. Since this

market is made up of a single retailer they have full power to set the prices and there will be no

competition for the pricing to change [ CITATION Article \l 1033 ]. Where there is a single

vendor for an item that vendor tends to reduce the number of items that they release to the

market. Then they will raise the price to capitalize on the fact there are no substitutes and

consumers will not buy from someone else (Baye & Prince, 2017, p. 222).

Example

There can be natural monopolies that the government allows to exist utilities, telecoms,
internet, and national defense not name a few. These companies require high start up costs and
massive infrastructure investments, so it is more efficient for the government to regulate one
[ CITATION Cor1 \l 1033 ]. Other types of monopolies are due to economies of scale like small
town gas stations and movie theatres that are large enough to service a small area [ CITATION
Bay17 \l 1033 ].
Long/Short-Run Analysis

To order to determine whether a dominant market structure is the best decision, short-

term or long-term demand would have to be calculated. A monopolistic business, because they

set the prices, is not a price taker. For the product they sell, the business may face a downward

sloping demand curve. A monopolist can also suffer losses and break even in the short run, based
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on the average total price level at the highest output level. The monopoly business must look at

maximizing profits and reducing losses. Generally, in the short term, a monopoly would serve as

a great competitor.

A business is more concerned about the long-term equilibrium, regardless of the size of

the market. When evaluating a monopoly firm's long run, the optimal output rate is where the

slope of marginal income is equal to the long run marginal curve. Additionally, the company will

not be operating on the long-run average cost curve at the lowest point. The entry barriers give

rise to a long-term monopoly that generates economic profits. This is valid only if there is no

shift in demand or price curves.

Monopolistic Competition

The competition consists of many firms selling identical goods which can be considered

exclusive due to specialization, causing prices to remain lower than marginal costs. Due to the

specialization, each product will be deemed a monopoly. The entire market is considered

competitive because the amount of difference is not enough to nullify the potential for any

effects that any substitutions may have possibly had [ CITATION Article \l 1033 ].

When there are many retailers with a single service the distinction of the brand can be

based on several market factors. According to the monopoly component of the market structure,

monopolistic competition is called imperfect competition. It happens because the goods are

diverse, but with near substitutes the power is limited. Nevertheless, the market structure also has

some ideal competitive elements. Most diverse goods vendors are too limited to impact others

when prices change [CITATION Bay17 \p 222 \l 1033 ].

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Example

Numerous smaller businesses work under monopolistic competition constraints, like

high-end stores and restaurants that are owned and operated independently. Restaurants that

offer something different at the individual places that gives that level of uniqueness allows the

aspect of individuality to create the monopoly, but they all fight for the same customers in

essence

[ CITATION Eco \l 1033 ].

Long/Short-Run Analysis

A monopoly competitor faces a demand curve that is strongly price-elastic, suggesting

that the demand curve is sloping adversely. Private firms will be able to succeed with a large

amount of competition on the market. The number of distinct goods will increase as the

population increases. This is because the marginal usefulness of income is inversely related to

the total spending on private goods, thereby increasing the marginal usefulness of revenue. The

optimal production rate is where the total income is equal to the marginal cost, as with other

economic systems. A dominant business could generate gain, loss, or break-even in the short

run.

When companies gain income in the short run, more businesses will enter the market in

the long run. There are no long-term obstacles to business entry and exit. Shifting the demand

curve to be more cost flexible than in the short run, each monopoly rival is left with a smaller

market share due to the wider range of opportunities being open in the long run. This can lead the

organization to break even at the optimal point and at any other point suffer losses [ CITATION

Eco \l 1033 ].

Perfect Competition

In a perfect competition, buyers are so diverse and scatter they can't control prices well.

The combining of a wide range of companies that can openly enter or exit the market and treat
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prices as information as each bidder only offers a small share of the good to the market does not

create a significant effect on it. Competitors are therefore unable to affect market clearing price

levels [ CITATION Pol \l 1033 ].

Example

Definitions of companies that meet all the parameters for “perfect knowledge” and/or

“perfect information” are hard to find in the real world. Some businesses, though, are

similar:

1. Foreign exchange markets: all currencies are similar here and dealers will have access

to many unique buyers/sellers. There is always good information available on relative

prices and it is easy to compare prices when in the market for currency.

2. Agricultural markets: There are several producers exporting identical products to

the consumer in some cases, as well as many customers so comparing rates is quick

therefore the market is very close to be a perfect competition.

3. Internet-related industries: the internet has taken most economies back to perfect

competition because the internet has made it convenient, fast and efficient to

compare prices. The cloud has reduced entry barriers and it is close to perfect

competition to sell a common product on the internet through a website such as e-

bay. Comparing book prices for several different vendors and purchasing the least

expensive fast via the internet is easier. Book sellers are selling at lower prices than

many of the other book that businesses on the web and are making normal profits

[ CITATION Pol \l 1033 ].

Long/Short-Run Analysis

The company will remain in business in the short run of the optimal equilibrium market

structure, even if losses are sustained. This is because the company's best short-term production
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rate is the one where the organization maximizes revenue and minimizes losses. Nevertheless,

the deficits must not surpass the fixed costs. Typically, this occurs when the marginal cost is

equal to the marginal income. The perfectly competitive product, though, will have an endlessly

inelastic demand curve in the short run. This is because the company is a price taker which

means they can't change the market price, or they're going to lose customers. For a perfectly

competitive business, the optimum point is where production is equal to marginal profit and

value is equal to marginal costs [ CITATION Pol \l 1033 ].

A perfectly competitive business must operate, in the long run, where the supply and

demand are equal to the nominal income, which is equal to the marginal costs. This is no

different from the short run; however, once the company earns a profit in the short run, due to

the easy entry, more businesses would join. While all products and prices are long-term

dependent, all business earnings can be decreased by new firms entering the market. Industries

must break even when this happens, and they will have no financial gains. When a competitive

market is in a long-run balance, both companies produce or break even at the lowest point on

their long-run average cost curve [ CITATION Pol \l 1033 ].

Oligopoly

Oligopoly has been known to be a form of market structure halfway between the two

extremes: perfect competition and monopolies. This sort of imperfect competition is

characterized by the comparatively small number of companies that offer a diverse product but

always more than one. The approaches between firms will be interdependent due to the small

number of firms on the market, meaning that an oligopolistic firm's revenues will depend heavily

on the actions of its competitors [ CITATION Pol1 \l 1033 ].

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Industries on the oligopolistic market may have a wide range of behavior patterns making

it difficult to have a single model. Static models are used as they offer a simple way in this

market to evaluate equilibria. Nonetheless, the company's task of maximization will be

distinguished by the different context of competitive interdependence in which that sector exists.

Therefore, in order to choose the best strategy to pursue, the company must predict and gather

the reactions of its rivals in its optimization problem. Consequently, we need to suggest a

conjectural interpretation on how rivals change their actions as the organization changes tactics

[ CITATION Pol1 \l 1033 ].

Example

Fixed broadband services, airline, fuel retailing, automobile, and banking are all

examples of an oligopoly. When one of these companies change their pricing or market strategy

not only are their profits affected but the profits industry wide are affected. So therefore when

one makes a change they all make a change. This is called interdependence among the firms and

it is the defining feature of an oligopoly. It is very difficult to manage a firm in this type of

industry because there is a lot of game play involved. Knowing how to strategize and plan

accordingly will go far in an oligopoly [ CITATION Bay17 \l 1033 ].

Game Theory

Game theory is the study of the strategic thinking to analyze, in conjunction with other

players and, ultimately, in an atmosphere of competitive interdependence, the actions of rational

game players seeking to maximize value, income, gain, etc. Economists can use game theory to

forecast the responses of firms in several situations. It is mainly used to clarify how corporations

can join forces and why they can then choose to break any conspiracy deal [ CITATION Ami13 \l

1033 ].
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Long/Short-Run Analysis

Five fundamental determinants of Porter's strategic framework will help business

sustainability and competitiveness in the short term in an oligopolistic industry. An oligopolist

company will be able to earn a profit, break even, and suffer a loss if these five fundamental

determinants are considered in the short run. The business must leave the industry in the long run

unless it either receives revenue or splits. In the long run it is harder to determine the optimal

output level for an oligopoly[ CITATION Ami13 \l 1033 ].

Porter's Strategic Framework 5-forces

1. Supplier power – A measure of how easy it for a supplier is to drive up the prices.

This is influenced by: amount of suppliers for each key input; product or service

distinctiveness; supplier relative strength and size; and cost of relocating from one

supplier to another.

2. Buyer power – This is motivated by the number of buyers on the market; the value to

the company of each single buyer; and the price to the consumer of moving from one

manufacturer to another. If a corporation has only a few strong customers, they can

often dictate the terms. This is a measure of how simple it is for the consumer to

push down the prices.

3. Competitive rivalry – The main driver is the market is number and capacity of

competitors. Most entrants would reduce the profitability of the competition by

providing undifferentiated products and services.

4. Threat of substitution – Where similar replacement goods occur in a market, in

response to price increases, this increases the likelihood that consumers will turn to

alternatives. It decreases both distributor control and consumer attractiveness.

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5. Threat of new entry – Profitable businesses attract new competitors, thus eroding

competitiveness. If incumbents have clear and enduring entry barriers, such as

trademarks, economies of scale, capital requirements, and government policies,

otherwise productivity will be limited to a competitive rate.

Regulation, taxes, and trade policies are potentially making government a sixth power for many

sectors [ CITATION CGM13 \l 1033 ].

Conclusion / Biblical

Overall, a firm could be in one of several market structures however the best one will

depend on the market atmosphere. All the structures will have advantages and disadvantages

therefore it is up to the individual firm to study the climate of the market and set their own

pricing strategies to determine which market structure best suits their type of firm.

John the Evangelist wrote a letter to all the believers and in that letter, he says to love not

the world, neither the things that are in the world because if any man loves the world, the love of

the Father is not in him. For all that is in the world, the lust of the flesh, and the lust of the eyes,

and the pride of life, is not of the Father, but is of the world and the world will pass away, and

all the lust thereof, but those that do the will of God will abide forever (1 John 2:15-17). We are

to occupy and spread the gospel for as long as we are here and that is it. All the market

structures endgames are for profit and money is the lust of the flesh.
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References

Amir. (2013, July 22). Oligopoly and game theory. Retrieved from

Economicsguide: http://www.economicsguide.me/?page_id=1192

Baye, M. R., & Prince, J. T. (2017). Managerial economics and business strategy (9th ed.). New

York: McGraw-Hill Education.

CGMA. (2013, June 11). Porter’s Five Forces of Competitive Position Analysis. Retrieved from

CGMA: https://www.cgma.org/resources/tools/essential-tools/porters-five-forces.html

Corporate Finance Institute. (n.d.). Natural Monopoly. Retrieved from Corporate Finance

Institute: https://corporatefinanceinstitute.com/resources/knowledge/economics/natural-

monopoly/

Economics Online. (n.d.). Monopolistic competition . Retrieved from Economics Online:

https://www.economicsonline.co.uk/Business_economics/Monopolistic_competition.html

Policonomics. (n.d.). Market Structures: definition. Retrieved from

Policonomics: https://policonomics.com/lp-market-structures-market-

structure/

Policonomics. (n.d.). Oligopoly. Retrieved from Policonomics:

https://policonomics.com/oligopoly/

Policonomics. (n.d.). Perfect Competition. Retrieved from Policonomics:

https://policonomics.com/perfect-competition/