Assignment: Discussion-Market Structures
Industries can be classified under different market structures and this classification strongly dictates decisions made by managers within the market. For example, in an industry classified under perfect competition, or in a perfectly competitive market, many competitors offer the same product and entry into the industry is easy.
In this market, the pressure to maintain the same prices as the competitors is high, which characterizes this market. On the other extreme, some industries are classified as monopolies and some fall under monopolistic competition.
In a monopoly, there is only one provider of a product or a service, which has an inelastic demand. In this case, there is little incentive for the monopoly to be efficient or price competitive. In a monopolistically competitive market, there are many firms selling a product or service that is only slightly differentiated from one another, and in the long term, these firms start showing characteristics of a perfectly competitive market.
Tasks:
Find an article about an industry in the United States, such as the pharmaceutical industry. You can consult sources such as the Wall Street Journal, Financial Times,Bloomberg Markets, the Economist, US News and World Report, and other publications for your reference.After reading the article, respond to the following:
- Identify the market structure that best characterizes the industry described in the article.
- Explain the factors you considered when identifying the market structure for this industry.
- Analyze whether this industry will work better if it changes its market strategy and starts showing characteristics of another market structure.
- Critically analyze the advantages and disadvantages of the market structures that you studied in the readings.
Student Response:
- Identify the market structure that best characterizes the industry described in the article.
According to Quickonomics, monopolistic competition builds on the following assumptions: (1) all firms maximize profits (2) there is free entry and exit to the market, (3) firms sell differentiated products (4) consumers may prefer one product over the other. Now, those assumptions are a bit closer to reality than the ones we looked at in perfect competition. However, this market structure will no longer result in a socially optimal level of output, because the firms have more power and can influence market prices to a certain degree.
- Explain the factors you considered when identifying the market structure for this industry.
Many small businesses operate under conditions of monopolistic competition, including independently owned and operated high-street stores and restaurants. In the case of restaurants, each one offers something different and possesses an element of uniqueness, but all are essentially competing for the same customers (Economicsonline).
- Analyze whether this industry will work better if it changes its market strategy and starts showing characteristics of another market structure.
The company that acquires a very high market share exposes itself to a number of risks that its smaller competitors do not encounter.
Competitors, consumers, and governmental authorities are more likely to take certain actions against high-share companies than against small-share ones. Smaller competitors, for example, can direct certain types of attack against larger organizations, attacks that would not work as well against companies of equal or smaller size. One type of attack has been to file private antitrust suits in an attempt to demonstrate that the larger competitor has violated antitrust laws while amassing its dominant share.
In one of these suits, a court recently ordered IBM to pay Telex $259.5 million (this was later reversed by an appeals court). Eastman Kodak, Xerox, Anheuser-Busch, Gillette, and General Foods are currently involved in other private antitrust actions. Another type of attack involves the use of comparative advertising. Avis, B.F. Goodrich, Seven-Up, and others have found it profitable to mention or picture the products of their large competitors in their ads, and then to suggest the superiority of their own products.
Critically analyze the advantages and disadvantages of the market structures that you studied in the readings.
Advantages: buyers get plenty of options due to differentiated products as every product has some additional feature which is not the case with perfect competition where sellers sell homogeneous products or in monopoly where sellers do not bother to add new features to product as there is no competition. Monopolistic competition is that since different companies are selling differentiated products they tend to advertise about it through various channels of communication which make customers more aware about the various products and their features which in turn helps the customers in making informed decision by comparing the features of various products.
It helps in innovation because the only thing which will help the company in surviving in case of monopolistic competition is to constantly add new features to product and hence in a way one can say that monopolistic competition forces the companies to invest in research and development so that the company can produce better quality product at cheaper rates than their competitor (Parikh, 2016).
Disadvantages: monopolistic competition is that due to differentiated products chances are companies may charge more than fair price from the consumers for extra features in product because unlike perfect competition where there is no scope for companies to charge higher price as companies sell homogeneous products. monopolistic competition is that companies in order to differentiate their products from other companies add irrelevant features and do not concentrate on improving the basic product which in turn results in consumers paying extra for added features but in reality that feature of product does not result in increase in consumer surplus.
In monopolistic competition companies spend too much money on advertising as it is the most important part as far as monopolistic competition is concerned which in turn results in increase in expenses for the company and company in turn passes this increased cost to consumer in the form of higher price for the product (Parikh, 2016).
References
Bloom, P., & Kotler, P. (1975, November 1). Strategies for High Market-Share Companies.
Economicsonline. (n.d.). Monopolistic competition.
Parikh, V. (2015, October 3). Advantages and Disadvantages of Monopolistic Competition.
Quickonomics. (2017, October 8). The Four Types of Market Structures - Quickonomics.