Characterization of the Various Market Structures
A market structure refers to the distinctive features that characterize the operations within a particular industry. Each organization that is in business or aspires to be a profit-making venture must fall into one of the four major market characterizations. This paper will discuss the four market structures using examples of well-known organizations.
One of the industries that may exemplify this kind of a market structure is the food and beverage industry. Thus, cafes and fast food stores can be used as examples. McDonalds is a fast food chain store, and it typifies the characteristics of a firm operating in a perfectly competitive market. First and foremost the number of firms that fall in this industry are numerous. Some of the firms that can be said to be in direct competition with McDonalds include Subway, Dunkin Donuts, Pizza Hut, Starbucks, and Dominoes among hundreds of others. McDonalds is further characterized in this industry due to the nature of pricing in the industry. The average price of a standard sandwich is $7. If the company decides to increase their average prices to $10 for an ordinary sandwich without any increase in value, its customers will switch to the competitors mentioned above. This means that the demand is perfectly elastic, and any unjustified slight increase in price is likely to drive away the customers to the market. Another trait of this market structure is that the products are homogeneous. Again, using the example of a sandwich, the same experience of consuming one at subway is the same experience one is likely to have at McDonalds. Save for the occasional differences that one might feel at different joints, the core ingredients are similar in all the stores and the experience one will get in consuming a sandwich at either store is the same. Lastly, the fast food industry is characterized as a perfectly competitive market because there seems to be relatively few barriers to entry and exist. Any entrepreneur who wishes to establish a fast food joint can do so with a modest amount of capital. Similarly, there are no special incentives in the form of supernormal profits that might dissuade an investor from leaving the industry.
Marginal analysis refers to the cost of producing an extra unit as well as its impact on the firm’s profits. In this type of market structure, the marginal cost is the same as the marginal revenue implying that no additional profit is made from producing additional units. That is because profits can only be maximized where the additional revenue derived from producing the extra unit is greater than the additional cost. Thus, for McDonalds and other firms operating in the industry, the profit is maximized when the marginal cost equates the marginal revenue.
This form of market structure is common in many industries. It is essentially similar to the perfect competition and the only difference is that consumers may lack perfect information of the industry plus the products are slightly differentiated. One of the companies that operate in an industry that exemplifies monopolistic competition is Nike. The company operates in the sports in the sports apparel industry that is responsible for the manufacture of a wide range of sports attire including athletic shoes. Nikes operates alongside many other organizations in the production of athletic shoes including Adidas, Puma, Converse, Sketchers, New Balance, Reebok, and Asahi among many others. Some are not even known but still have a share of the market. Nike in a monopolistic competitive environment, because there are many sports shoe manufacturers. However, the prices charged by each of the manufacturers vary to some extent. The there are over 100 sport shoe manufacturers and for a typical running shoe, the price will range from as low as $55 to $130 depending on the strength of the brand. The difference in pricing will however not significantly influence the choice of consumers. That is to say, a consumer will not necessarily be influenced by the price as he or she is selecting a pair of shoes. Another distinguishing feature of producers in this industry is that their products are only slightly differentiated. Whether a shoe is manufactured by Nike, Adidas, Puma or even a less renowned firm like Asahi, it will serve the fundamental purpose for which it was manufactured. The major difference with these shoes is the packaging as well as the branding. So the brand is a major factor to consider before deciding to purchase an athletic shoe.
Regarding marginal analysis, a firm in this industry, must increase the quantity of its output to maximize its profits. Due to the high level of competition, the firm must slightly lower its cost to increase the quantity demanded. Profit is maximized where the cost of producing an extra unit is less than the revenues generated from such extra production (Diaz Ruiz, 2012). Nike Inc, in this case, aims to sell more units of its athletic shoes and hence will make a profit provided their marginal revenue is equal to the marginal cost.
This market is characterized by generally few producers whose products may or may not be differentiated but are close substitutes. As a rule of the thumb, getting into this market is difficult as there are numerous barriers to entry which derive from diverse sources. BMW is an example of a company that is in an industry which exhibits oligopolistic characteristics. The company operates in the car manufacturing industry where there are relatively few known players. Cars are close substitutes of each other with the difference from different manufacturers being very slight. Whether a vehicle is manufactured by BMW, Ford, Mercedes-Benz or Toyota, the primary function is the same. Despite this, there are few renowned manufacturers of motor vehicles. The main barrier to entry into the industry which BMW operates is the huge capital requirement needed to set up shop. A new motor vehicle manufacturer needs to invest millions of dollars to gain a foothold in this industry. Even if an investor has the capital, there is no guarantee that he or she will get a sufficient return on capital since the firms that are already in the market are well established and even have carved niches for themselves.
The demand curve for firms in this sector is inelastic. This means that a change in price has little or no effect on the quantity demanded. For instance, when BMW increase the price of the X5 model by a few thousands of dollars, its loyal customers will be largely unresponsive to this change in the pricing. Companies in oligopolistic firms experience what is known as a kinked demand curve. This curve comprises three segments. One for higher the price which is quite responsive to price increases, another for price a decrease which is highly inelastic and the kink for a profit maximizing firm. A company that wishes to maximize its profits must, therefore, produce the marginal units at the point of the kink.
The distinguishing feature of entities that plies their trade in such a market structure is the exclusive right to entire market. Under a monopoly, there is only one supplier who is the price setter and determines their margin. The most common source of monopoly power is the legislative authority. Most monopolies derive that power from laws made the legislature. An example of an organization that is a monopoly is the United States Postal Service (USPS). The entity was established in 1792 via a statute that granted it the sole authority to deliver letters for a fee. Another distinguishing feature that characterizes this market structure is the numerous barriers to entry. Entry into the market is restricted, and only firms with the capacity can do so. In this case, no firm can deliver mail in the US unless it has been granted that authority by the government. Thus, other firms are not free to participate in the business that is carried out by the USPS.
The marginal analysis in a monopolistic firm is determined the level of profits that the firm intends to achieve. For a monopoly, the demand is inelastic since, in many cases, the producer is a supplier of an essential good or service. To maximize his profit, the supplier must try to sell as many units as possible. The organization must lower its prices, to attain an increase in sales. Thus, to maximize the profit, all a producer has o do is to ensure that the marginal revenue is more than the marginal cost.
This paper outlines the four major market structure and provides an overview of their characterizations. Using the examples of McDonalds in the beverage and food production industry, Nike in the shoe industry, BMW in the motor vehicle manufacturing industry and the United Stated Postal Service, the paper outlines the major features that qualify them for the respective market structures.
Summary of the Major Points
- In a market structure where the market is perfectly competitive, the key distinguishing feature is that the products are homogeneous and hence close substitutes of each other
- In a market where there is monopolistic competition, is that there are many suppliers of the products or service who are price setters, but their goods are slightly differentiated
- In an oligopoly, the market has very few suppliers, and it is not easy to enter into the market since there are many barriers including price
- Where a market is said to be monopolistic, there is only a single vendor of the product or service and he has the exclusive right to offer the product for sale
- Lastly, it is important to note that each market has unique characteristics but some of the factors that embody one market structure can be a feature in others as well.