Differentiating Between Market Structures

Differentiating Between Market Structures

Differentiating Between Market Structures

The market structure in which a business operates is important to its competitiveness and profit maximization. The three basic market structures are monopoly, oligopoly and perfect competition. A monopolistic market structure occurs when one producer and seller for a specific product controls the market. An oligopoly is comprised of only a few companies which make up an industry. A perfect competition market structure is the result of a theory or notion based on assumptions and is considered the extreme opposite of a monopoly. The definitions of the three basic market structures highlight several differences. The battery industry operates under an oligopolistic market structure. Duracell is the leading competitor in the battery industry and is only challenged by Energizer. Although; Duracell currently operates under an oligopolistic market structure, it could effectively function and remain profitable in a perfect competition or monopolistic market structure. There are three competitive strategies Duracell might use to increase its profits in the long run.

                                 The Three Basic Market Structures

Monopoly

A monopolistic market structure occurs when one producer and seller of a specific product controls the market. In other words, the business operates within its own industry. High entry barriers into a monopolistic market exist because of high costs, or political, social, or economic obstacles. For example, Middle East governments created a monopoly over the oil and petroleum industry in order to control it. The entry barriers of a monopolistic industry may be created by the exclusive rights of various resources. For example, TXU Energy of Texas has exclusive rights to all government subsidized power plants. A monopoly may also occur based on a company’s copyrights or patents that make it impossible for others to enter the market. For example, Disney owns the copyrights to its rides and characters. A company that is in a monopoly has the entire control over almost every aspect of the market. It is a price fixer, which typically faces inelastic demand of its products. Profits are produced in the long run and they seldom exploit customers. Profit maximization occurs at the intersection of marginal revenue and marginal cost. The demand curve is downward sloping.

Oligopoly

An oligopoly is comprised of only a few companies which make up an industry. This group of companies control pricing, and like a monopoly create high barriers to entry. Most often capital-intensive industries operate under an oligopoly market structure. The products in an oligopolistic market structure are many times identical, resulting in the companies competing for market share. For example, if the economy demands 500 fly swatters. One company produces 250 fly swatters and its competitor, produces the other 250. Each company’s prices will be dependent upon one another. If one company sells its fly swatters at a cheaper price, it garners a greater profit, and forces the other company to lower its prices.