Differentiating Between Market Structures
May 27, 2013
Market structure is the physical characteristics of the market within which companies react. This means that there are different kinds of market structure based on how companies work together within a particular industry. Location and product have the most to do with determining the market structure. There are four defined market types. The first market structure is called the perfectly competitive market. The second market is called a monopoly market structure. The third market is called monopolistic competition market structure. The final market is called oligopoly market structure. Each market structure is different and both benefits and disadvantages to businesses. The perfectly competitive market is a market in which economic forces operate unimpeded. There are also factors that must occur for a truly perfect competitive market to exist. The first factor is that both buyers and sellers must be price takers. Price takers are those who take the price determined by market supply and demand as given. The next factor of a perfectly competitive market is that there are a large number of companies. Companies need to be large enough to ensure what happens to one company will not influence the business of the other companies. Another factor to a perfectly competitive market is that no barriers exist for entry into the industry. This includes social, political and economic barriers being nonexistent. Products in a perfectly competitive market must be identical, absolutely no distinguishing factors. Complete information must be accessible to everyone in the market to facilitate a perfectly competitive market. Information like prices, products and available technology must be made available by the companies to other companies and individuals. The final factor in securing a perfectly competitive market is that selling firms are profit maximizing entrepreneurial companies. This ensures that the companies make decisions to maximize profit regardless of other income. The monopoly market structure is one in which one company makes up the entire market. Monopoly market structures normally occur when there are barriers to enter the market that make it impossible for other companies to enter the market. Patents are one barrier that does not allow other companies to manufacture or sell similar or identical products. Sometimes sociological barriers may occur like customs or traditions of an area. An example of this would be if an American company wanted to expand into the global market and did not take the local customs into account. The American company would then be barred by the community to enter the market. Natural barriers can occur when there is no way for another company to duplicate the monopoly product or service. Technological barriers can also occur especially when the market can only support one company.
The monopolistic competition market structure is when there are many companies selling differentiated products and there are few barriers to enter the market. In a monopolistic competitive market there are several selling companies. These selling companies have differentiating products. There are also multiple dimensions of competition including price and products. Easy entry into the market is also required for companies.
The fourth market structure is called oligopoly. In an oligopoly market there are only a few companies and companies explicitly take other company’s likely response into account. In an oligopoly market companies become mutually interdependent. There only a few companies in an oligopoly market causing each company’s decisions to affect other companies in the market. Strategic planning is increasingly difficult in an oligopoly market due to the constant need to consider other companies reactions in the decision making process. A company that entered into a market in June of 2008 is Kudler Fine Foods. Kudler Fine Foods is...
References: Colander, D. C. (2010). Economics (8th ed.). New York, NY: McGraw-Hill.
Kudler Fine Foods Virtual Organization Link retrieved from www.phoenix.edu
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