The Four Major Market Types
|Topics:||🛒 Consumerism, International Business, 💵 Finance, 💳 Microeconomics|
Table of Contents
Markets in economics do not refer to a specific place or location. Markets are used to refer to the commodities being traded instead of a place as commonly used. For instance, we may talk of a car market or any other commodity of service that one can think of. Economics identifies five types of markets that exist in the world. The markets differ from each other on a number of issues. One of the major points of divergence is the number of market participants in the industry selling specific products or services. The second differentiating factor is the product attributes (the degree of differentiation). Differentiation is also based on the barriers to entry into the market. Some markets exhibit high barriers to entry while others have low or no barriers to entry. This essay explores the four major market types: pure competition, monopolistic competition, oligopoly and monopoly. The analysis will also show how each market differs from the rest of the markets and the examples in real world.
Market Structure Types
One concept that is commonly used in market structure analysis is differentiation. According to Krugman and Wells (2013), “differentiated goods are goods that are different but considered somewhat substitutable by consumers.” These are products that can be used for a similar purpose but are perceived to be different e.g. the difference between Pepsi and Coke. The second difference relates to the number of firms or producers. These are the agents who bring the products or services to the market. Again you can think of Pepsi Company and Coca-Cola Company as examples of firms.
Pure competition is different from the other three market structures. To begin with, pure competition refers to a market where there are many sellers and buyers. Economics defines it as a market where there are infinite sellers and buyers. The most basic difference between perfect competition and other market structures relates to pricing. In a pure competition, all the firms are price takers. This is because the firms has little control over the price. Prices are determined in the market through the interaction of the forces of demand and supply (Baumol & Blinder, 2009).
Another differentiating factor is that in a pure competition, products are identical. There is no differentiation between products offered in the market and this is one of the reasons price cannot be determined by the firm. Because every firm offers an identical product, charging a price above the competitors sends customers away to the competitors.
In addition to price and product differentiation, the perfectly competitive markets are characterized by ease of entry and exit. The cost of entry and exit into the market are so low so any firm may be able to enter the market and leave as it deems necessary. The ease of entry is also the reason there are infinite sellers in the market.
What are some of the examples of pure competition? Well, it is hard to say that there is a market that is purely competitive at the moment. There are markets that however, appear to resemble perfect competition. One such example is the agricultural produce market. The market for agricultural produce is seen as relatively competitive because there is no large differentiation between products. There is also a large number of sellers in market and prices are determined at the market. Another example of a perfect competition is the internet. There is a very large number of sellers and buyers of internet services. Buyers also have perfect information which is easily accessible over the internet. Entry and exit are also relatively easy. Prices are relatively the same because customers can easily sift through the prices and compare the bargains.
The monopolistic competition is defined as a market where the number of sellers is many but the products are differentiated. The products in a monopolistic competition can all be categorized into one generic group. However, each product has some salient differences from the rest of the products in the market. One of differentiating factors is the brand name. Brand names are also used to create some level of differentiation between products. The sellers control over the branded item gives him or her some level of control over the goods. There is some level of barriers to entry and this limits the number of firms or sellers in the market.
There is little level of monopoly power in this market because other sellers may not produce a similar good under the same brand name. As a result of this control over a product, the seller has some level of control over the prices of goods. According to Datta (2017), the demand functions faced by monopolistic competition firms are different from perfect competition in that they are downward sloping. Datta also notes that because the firms “elasticity of demand is not infinity, the degree of monopoly power is positive.” Monopolistic competition and pure competition are however similar in the sense that they both entail price competition among the number of firms.
One of the examples of monopolistic competition is seen in the bars and nightclubs market. Each establishment has its own prices and offers goods and services that may have real or perceived differences. While all of them sell beer, it is possible to find the prices are different as you move from one establishment to another. The differentiation is mostly perceived and is created through hospitality services, interior ambience, the location and other things not related to the products being sold. Another market that shows characteristics of a monopolistic competition is the specialty coffee market. There are many sellers in the market all selling coffee. However, each seller is able to sell at a different price because of the real or perceived differences in their product, such as the brand name (Lipovsky, 2017).
An oligopoly is the kind of market that is comprised of a small number of sellers. The number of sellers is kept low by the significantly high barriers to entry. Firms in an oligopoly market produce either differentiated or identical products. There are also incentives for firms to engage in illegal activities because of the relatively small number of firms that allows them to engage in illegal agreements. Such agreements could allow the firms to fix prices, split markets or limit the level of competition. Antitrust laws however limit such practices so there generally a high level of competition among players in an oligopoly market (Hirschey, 2009).
The distinguishing characteristic of an oligopoly is the fact that there are just a few firms who are responsible for the total or much of the output in the industry. There is an interrelation of price and output decisions in the market. Firms therefore anticipate the possible reactions of the competitors when setting their prices or output levels. Firms in an oligopoly spend a lot on product differentiation, advertising and other methods of competition that do not relate to price directly. This investments ultimately result in high output and price for the firms (Tucker, 2010).
An example of an oligopoly exists in the smartphone market. In the smartphone market, the number of sellers in not small. However, there are a few dominant firms that make up the bulk of the industry output. The top players and Apple and Samsung. The companies invest a lot of money on advertising, and research and development. This investments allow them to make up products that give them an edge over the competition and their production makes up the largest part of the smartphone market. The airline market can also be seen as an oligopoly market. Because of the high initial capital outlay, the number of entrants is not high. The few firms in the market compete on service differentiation to maximize their profits.
Monopoly is most widely known type of market structure. The monopoly lies at the extreme end of market structures. In monopoly form of the market, the seller has all the market powers. The major characteristic of the monopoly market is the existence of a single seller. There is also only one unique product in the market. In addition, it is impossible for other sellers to enter the market. The single unique product sold by a monopoly seller has no substitutes. The consumer is therefore left with only two choices; to buy the product from the monopoly seller or to stay without the product (Tucker, 2009).
In a monopoly market, the seller has the power to set prices for the product as he wishes. The monopoly seller may set the prices to be uniform across the market. In other instances, the monopoly seller can establish price discrimination where different sets of buyers are charged different prices from other sets. It is also the seller who determines how much to produce and how much price to pay to suppliers in the market. Monopoly exists in two distinct forms; natural monopoly, and artificial monopoly. Natural monopoly arises as a result of high startup costs and fixed costs of operations. Artificial monopoly is created when measures are put in place to intentionally prevent other firms from entering into the market (Bumas, 2015).
The most common examples of monopolies exist in utilities. Public utilities such as water, sewerage, electricity exhibit monopoly market characteristics. These are often natural monopolies and exist because the cost of infrastructure required to run them and the costs of operations are often high. Google is also considered a monopoly in most parts of the world especially in North America and Europe. In these regions, the most or the only used search engine is Google to the extent that is has come be used as a verb meaning to look something up on the internet.
It is clear that markets differ depending on a number of factors. Those industry that have high barriers to entry show the existence of either oligopoly or monopolistic markets. Industries will low or no barriers to entry are dominated by perfect competition. Monopolies exists as a result of extreme barriers to entry (legal, financial or technological) that exclude any other firm from entering the market. It is however, not clear whether perfect competition exists in the real world. The characteristics of a pure competition are not easily seen in any market. What exists are markets that closely resemble pure competition but they cannot be seen to fulfill all the requirements for a pure or perfect competition.
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