The way a business makes output decisions and pricing in their certain structures is impacted by the market structures. The main goal of all four market structures, perfect competition, monopolistic competition, oligopoly, and monopoly, is to minimize the losses while making the most of the profits. Though, the different structures of the market will have dissimilar resolutions concerning the output and price, contingent on the market structure’s characteristics.
Perfect Competition
There is no particular contestant that is too larger to have the essential power of market foe making a price of products that are homogeneous in a perfect competition market. Consequently, the perfect competition’s market conditions set the stage for an evaluation of other structures of the market. When a business sells similar products, along with having a small share of the market and no control over the price, its market is well-thought-out as perfect competition (Kapeller & Pühringer 2010). Moreover, the buyers in the perfect competition case have comprehensive information concerning the products and each firm’s prices. It is free to enter and exit in this market.
In the perfect competition cases, the impact on pricing and output is associated with the allocation of resources for allowing the maximum potential net benefits. The products are identical, and there is perfectly elastic demand curve. The structure of this market is rare; agricultural industries in certain cases can be an instance. Virtually, the crops are the same, and price programs supported by the government standardize the prices. This model is an essential basis for the subsequent models; though its applicability is little in the real businesses. There is no competition in price in this market structure for the reason that it is not essential. Also, there is no long-run market power or economic profit.
Monopolistic Competition
In monopolistic competition, there are several buyers and seller, in which each firm produces slightly differentiated products. In this market, there is easy entry and exit. This imperfect competition market shows a model in which a firm gets prices charged by competition and also ignores the impact of its prices on other firms. Besides, there is an inelastic demand that allows companies to set the prices for its goods. Since there is freedom of entry, there are going to be normal profits in the long term, but abnormal profits in the short term (Brakman, Heijdra, 2001).
An example of monopolistic competition is the automobile industry. When buying cars, we have several options to choose. There is competition, and new brands have freedom of entry. However, there are a few brands that are unique and have the power to charge a higher price for their cars. Under this market structure, the selling costs are the expenses promotion and advertisement, which can increase brand awareness and result in higher prices. Besides, different from a perfect competition, this market structure does not offer a perfect knowledge of the options for the consumers due to the associated attributes of brand image and advertisement, which often creates preferences for consumers for a specific brand (Brakman, Heijdra, 2001).
Oligopoly Market
An oligopoly market refers to the competition of a few. There are few competitors where these few dictate the price and control the market. There is importance in non-price competition, such as high quality or differentiated product. There are barriers to entering this market, such as patents or technology. There is also imperfect knowledge, in which customers are not aware of the best price and availability. In this market structure, the total revenue is based on quantity and price. Firms are independent and can decide to collaborate or compete in regards to pricing choices. Competing in price can decrease their market share, but it will also decrease the competitor’s market share (Baldassarri, 2016).
An example of oligopoly is cell phone providers. There are a few companies that provide cell phone services. When paying attention to commercials, these companies often use each other as means to address pricing. Thus, the price of competitors makes an impact on the price that a firm will designate to its services. In the case of cell phone providers, there are high technologies that need to be installed to be able to compete. As technologies become more accessible and new companies enter the business environment, this market structure is likely to change.
To maximize profits, in which marginal cost equal marginal revenue, the price, and quantity do not change despite the costs. Often, companies prefer to invest in product differentiation rather than cutting costs to maintain market share. However, it is often the case that firms base their prices on the competition. Ways in which companies differentiate their brand is through customer services, new technologies, discounts and others. Due to the barriers to the entrance, there are only a few companies in this market structure (Wellmann, 2004).
Monopoly Market
In a monopoly, there is no competition. The absence of competition relates to the fact that there is only one producer that will set the price. Monopolies are usually controlled by the government. Besides, the companies have substantial or total control on the price and output decisions. The entry in this kind of market is difficult due to high or very high barriers. In regards to product differentiation, this kind of market offers a product that cannot be offered by any other firm. An example of a monopoly is a local water company. The company has control over the price and output decisions, and there is no other firm that can provide this services.
According to Onozaki and Yanagita (2003), monopoly and oligopoly emerge out of competitive situations as the key parameter of consumer’s inertia increases. An example of a monopoly is pharmaceuticals that hold patents to a certain formula or medication. As a result, that company is the only one allowed to produce the medicine. Due to the demand for the medicine, the company can price the good as it wishes, and there is no other product that can substitute theirs, resulting in a monopoly being able to control the price.
In a monopoly, the firms maximize the price with the limitation of demand and price elasticity. Changes in the business environment can break a company’s monopoly. In the example of farmaceutical patents, an expired patent might bring new companies to the scene, thus changing the monopoly structure.
Conclusion
Market structures impact the way an organization makes pricing and output decisions in their particular structures. In a perfect competition market, there is no single participant that is too large to have the necessary market power to make a homogeneous product’s price. In monopolistic competition, there are several buyers and seller, in which each firm produces slightly differentiated products. An oligopoly market refers to the competition of a few. There are few competitors where these few dictate the price and control the market. In a monopoly, there is no competition. The absence of competition relates to the fact that there is only one producer that will set the price.