Exploring Different Market Structures: Implications for Managers
What is a Market Structure?
Market structure in economics means how the various industries are differentiated and classified depending on the degree and the type of competition of the services and goods. It depends on the features which impact the practices and the consequences of the organisations that work in the specific environment (Ren et al. 2019). A wide variety of factors determine the market structure, which comprises the unit of sellers and buyers, the potential to bargain, the extent of differentiation of products and concentration and the flexibility or difficulty involved in making an entry or exit from the market.
What are the features of a market structure?
The market structure can be comprehended by evaluating the factors and features shown by the different players (Ren et al. 2019). Hence it is necessary to restrict the markets based on the features listed below:
- The buyer structure of the industry
- The turnover rate of the customers
- The level of differentiation of the products
- The nature of the input costs
- The player who holds the maximum markets share
- The extent of the vertical integration in the same industry
- The number of players in the industry
What are the different types of market structures?
- Perfect competition
Perfect competition happens when many companies selling the same products compete against each other. These companies can enter or exit the market as per their will; however, they lack price influence over the commodities (Ren et al. 2019). In this market structure, consumers acquire in-depth knowledge of the products sold; hence, they are conscious of the pieces and the product’s popularity. In the practical world, this market structure barely exists (Andrés‐Cerezo and Fabra, 2023). Furthermore, the market structure is criticised as the profit margin is constant, and if sellers enhance the price, their customers will never return. This market structure offers very few barriers to entry, and to maintain the market share, the incumbents must stay proactive.
- Monopolistic competition
This infers an imperfectly competitive market where both the features of a competitive market and a monopolistic market exist. Sellers of the products can compete amongst themselves, and their goods can be differentiated in terms of branding and quality so that they might look different (Andrés‐Cerezo and Fabra, 2023). In the short term, the monopolistic market maximises the profits and takes advantage by being a monopoly. As the market demand is high, manufacturers produce many products. Marginal revenue diminishes, leading to less profit.
Read Also: How to Write a Market Research Assignment?
An oligopoly market consists of various large companies selling identical or differentiated products. As fewer players in the market exist, the competitive strategies are interdependent (Andrés‐Cerezo and Fabra, 2023). The organisation mutually compete and reaches an agreement that can restrict production, which may give rise to supernormal profits. Firms that operate in an oligopoly market structure set their prices, and thus the profits margins are comparatively higher than expected. The conditions that allow the oligopolies to exist comprise the increased costs in capital expenditures. However, the trade transformations and global tech has reversed the conditions (Andrés‐Cerezo and Fabra, 2023). Some managers regard oligopolies as stable as the firms view the advantages of collaboration as compared to the cost of economic competition. Firms also implement creative ways to avert the price of fixing.
In a monopoly market structure, the entire industry is represented by a single organisation, and this happens because there is no competition. The only seller of the product is a single company. The monopoly market structure is characterised by copyright, patent, and sole ownership of the resources (Andrés‐Cerezo and Fabra, 2023). All these features of the monopoly restrict the entry of other companies into the market.
A monopsony refers to a market condition where a single buyer exists. As there is only one buyer for the goods or services, the buyer sets the price, and the demand thus controls the price. Like monopolies, monopsonies are not regarded as efficient in a market where the demand and the supplies regulate the price to be fair enough for the customers. Monopsony can also occur in the labour markets (Durand and Milberg, 2020). It happens when a great employer and many other workers work to gain benefits. As only one employer of all the workers, they acquire the market power to set wages and decide how many workers to employ. In this regard, there are certain disadvantages as well. It decreases labour wages and increases societal inequality (Durand and Milberg, 2020). As compared to the marginal revenue products, the workers are paid less. In addition, firms with monopsony power barely care about the working conditions as they are left with no alternatives other than the leading firm.
Which market structure is preferred most by the managers?
The most preferred market structure is the monopoly market, which can offer the highest pricing power. In the absence of competition, monopolies enjoy increased economies of sales and can produce in large quantities at reduced cost per unit. As the company stands alone, it can invest much in innovation without apprehension of competition (Durand and Milberg, 2020). On the contrary, a company that tends to dominate a sector or an industry can also create artificial scarcities and provide low-quality prices keeping the prices of the products high. Thus the consumers need to trust that monopoly organisations function ethically owing to the unavailability or the limited substitutes in the market. In the UK, most of the reputed monopolies are related to technology; thus, they are known as big tech monopolies.
For instance, Microsoft is the market leader in the tech space. Similarly, Google has the greatest Web search engine, controlling about 70% of the market share. Over the years, the company has become popular in providing web services linked with other services such as Gmail, Google Drive, Google Maps, etc. One of the oldest social media platforms, Facebook, also practices a monopoly. It is ahead of all competitors and has experienced progress regarding users, advisors, mergers, and acquisitions with other companies such as Whatsapp and Instagram. However, the monopoly market structure cannot increase the welfare of potential suppliers (Durand and Milberg, 2020). Often the monopoly has the monopsony power for which they pay a lower price to the suppliers. Another reason why managers prefer monopoly power is that they can gain political power to shape society in an undemocratic way.
Some managers prefer the perfect competition market structure as the barriers to entry and exit are low (Durand and Milberg, 2020). The entire market benefits as it promotes healthy competition, allowing consumers to choose from various options. Products are manufactured as per the industry-wise standardisation. However, no incentives are provided to raise the price of the products. In addition, managers always have the availability of market information and only need to invest a little in advertising and marketing (Durand and Milberg, 2020). They also use the resources and implement those strategies so that their operations are cost-efficient. Many organisations are customer-centric. Managers in this regard also prioritise the preference of the consumers. Thus they prefer a perfect competition market as it helps promote the consumers’ welfare. They do not indulge in misleading advertisements, and there is hardly any scope for monopoly because of the limited number of producers and sellers that manufacture homogenous products. In addition, the chances of exploitation are meagre as consumers are entitled to high bargaining power.
- Ren, C.R., Hu, Y. and Cui, T.H., 2019. Responses to rival exit: Product variety, market expansion, and preexisting market structure. Strategic Management Journal, 40(2), pp.253-276.’
- Andrés‐Cerezo, D. and Fabra, N., 2023. Storing power: Market structure matters. The RAND Journal of Economics, 54(1), pp.3-53.
- Durand, C. and Milberg, W., 2020. Intellectual monopoly in global value chains. Review of International Political Economy, 27(2), pp.404-429.
Ans: Market structure refers to how the industries are differentiated and classified. This is done by the nature of their competition for goods and services. It is significant because it affects the outcomes of the market using the decisions and opportunities that participate in the market.
Ans: A few of the features of the market structure are the extent of differentiation, distribution and size of the firms and the entry and exit conditions. It also comprises the degree to which the company manufactures differentiated or homogeneous products.
Ans: A perfect competition market is an economic structure where many sellers sell similar or identical goods. It is the opposite of a monopoly market structure where only one manufacturer dominates the entire market while fixing the prices of goods per their wish.
Ans: Mangers of some organisations are customer-centric, and thus, they prefer a perfect competition market. They believe in promoting the welfare of customers to retain customer loyalty.
Ans: A monopoly market structure is advantageous as no other competitors exist. Monopolistic companies can earn increased profits compared to other market structures. Managers prefer a monopolistic market as they focus on profit maximisation over the welfare of customers.
Author Bio: Mark Edmonds, a cultivated creator in market structures, is a recognized proficient at Academic Assignments, a chief supplier of first rate marketing assignment help. With a significant comprehension of different market structures, Mark consolidates scholastic greatness with down to earth experiences, making him an important asset for students and managers. His mastery engages perusers to successfully explore many-sided market elements. Edmonds’ devotion to clarifying administrative ramifications grandstands his obligation to encouraging informed decision-production in the steadily advancing business landscape.