Distinguishing among the four market structures
Perfect competition
A market structure characterized by a large number of buyers and sellers, homogeneous products, perfect information, easy entry and exit, and no individual firm has control over market price.
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Distinguish among four market structures: perfect competition, monopolistic competition, oligopoly, and monopoly in this order. Identify your company’s market structure (i.e., perfect competition, monopolistic competition, oligopoly, and monopoly), explaining your reasoning. Examine whether competitive pressures are present in your company’s industry with high barriers to entry. Evaluate how high barriers to entry into the industry may influence your company’s long-run profitability.
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Monopolistic competition
A market structure with a large number of firms, differentiated products, limited control over price, and relatively easy entry and exit.
Oligopoly
A market structure with a small number of large firms dominating the industry, significant barriers to entry, interdependence among firms, and the potential for non-price competition.
A market structure where there is a single firm controlling the entire market, no close substitutes, significant barriers to entry, and considerable control over price (Friedman 1982).
Identifying your company’s market structure and reasoning
You need to determine the market structure of your company by evaluating the characteristics mentioned above and comparing them to your company’s industry. Consider factors such as the number of competitors, product differentiation, barriers to entry, and the extent of control over pricing. Based on this assessment, you can identify the most appropriate market structure for your company.
Examining competitive pressures and barriers to entry
Consider whether competitive pressures exist in your company’s industry. Are there many competitors? Are there significant barriers to entry, such as high capital requirements, patents, or economies of scale? High barriers to entry can limit the entry of new firms, reducing competition and potentially benefiting existing companies in the industry.
Evaluating the influence of barriers to entry on long-run profitability
High barriers to entry can provide an advantage to existing companies by limiting competition and allowing them to maintain higher prices and profit levels. If barriers to entry prevent new firms from entering the market, existing companies can sustain their market power and profitability over the long run (McAfee et al.,2004). However, it is essential to consider other factors such as changes in consumer preferences, technological advancements, and regulatory factors that can affect long-term profitability.
Explaining the price elasticity of demand and its effect on pricing decisions
Price elasticity of demand refers to the responsiveness of quantity demanded to changes in price. In different market structures, the price elasticity of demand can vary. In a market with perfect competition or monopolistic competition ( Patanakul et al.,2014), where there are many substitutes and a high degree of competition, demand tends to be more elastic. In contrast, in a monopoly or oligopoly, where there are fewer substitutes and limited competition, demand tends to be less elastic. Understanding the price elasticity of demand helps companies determine the impact of price changes on quantity demanded and make informed pricing decisions.
Investigating government regulations and their impact on the business
Research the government regulations that apply to your company’s industry. Determine whether these regulations encourage or discourage your business relative to its industry. Regulations can vary depending on the market structure and can impact factors such as entry barriers, pricing practices, product standards, and competition. Evaluate how these regulations affect your company’s operations and market position.
Analyzing the role of government and its effect on pricing
The role of government can significantly influence a market structure’s ability to price its products. Governments can regulate prices directly through price controls or indirectly through antitrust laws and competition policies. The extent of government intervention can shape pricing decisions, competition levels, and market outcomes. Consider how government actions, such as price regulations or policies promoting or restricting competition, may impact your company’s ability to set prices and operate within the market structure.
References
Friedman, J. (1982). Oligopoly theory. Handbook of mathematical economics, 2, 491-534.https://www.sciencedirect.com/science/article/pii/S1573438282020062
McAfee, R. P., Mialon, H. M., & Williams, M. A. (2004). What is a Barrier to Entry?. American Economic Review, 94(2), 461-465.https://pubs.aeaweb.org/doi/pdf/10.1257/0002828041302235
Patanakul, P., & Pinto, J. K. (2014). Examining the roles of government policy on innovation. The Journal of High Technology Management Research, 25(2), 97-107.https://www.sciencedirect.com/science/article/pii/S1047831014000133