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Introduction To Market Structures Economics Essay

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Published: Mon, 5 Dec 2016

Steve Ballmer, current CEO of Microsoft, once said I dont know what a monopoly means until somebody tells me. There are various definitions of monopoly depending on the views and beliefs of others. A simple definition of monopoly can be defined as a form of business structure which involves a producer, usually a single producer or sometimes a group of producers working together. In a monopoly, the market is usually controlled by the suppliers or in this case the producer. A monopoly involves a single seller who sells products which have no close substitution or alternative and usually has a very high entry and exit barrier. This means that the numbers of buyers of the seller’s products are usually very large. For example, in Malaysia, the country’s electricity supply is controlled by a single company, Tenaga Nasional Berhad (TNB) which means that they are the only existing company in this market and they are also the one who controls the monopoly. We as the citizens in Malaysia, have to pay our monthly electricity expanses which makes us the buyers. There are a few factors and key elements that define whether a business is categorised as a monopoly.

Defining Monopoly

A monopoly is a market structure which consists of a single seller or producer for a certain product but with the existence of a large number of buyers. In a monopoly, the business usually is the only dominant producer which means that there is only one seller of that certain product that usually has no close substitution or any replacement and it has a very high entry and exit barrier. For example, in Malaysia, the electricity supply is controlled by a single company, Tenaga Nasional Berhad (TNB) and it represents the country’s only supplier for electricity. Being the citizens in Malaysia, we are required to pay our monthly electrical bills without any alternate options and thus making us representing the large number of buyers. There are a few characteristics that explains what defines a monopoly.

Characteristics of Monopoly

In a monopoly market, there is usually a single seller that is in control of the market. A single seller in this context means that the seller may be an individual or may exist as a group and are in charge of the determining the price for the product. Using Tenaga Nasional Berhad (TNB) as the example again, a single seller means that there is no close substitution or alternative to that source of product. TNB is the only supplier for electrical power in the country and there are no similar companies that are competing against them. This means that TNB, who produces electricity, has no competition that may pose a threat to them. Therefore, they are the dominant market for electricity in the country. When a monopoly market exists, there is always the larger number of buyers that exists compared to other markets. In a monopoly, the product is made by a single seller and it is the only dominant one in the market and thus creating a high need for that product. Therefore, there will be a large number of buyers in a monopoly market.

In a monopoly market, there is also the restriction of entry of new firms. These restrictions prevent any new entries of new firms in the market. A monopolist faces no competition because of the barriers of entry. These barriers of entry are in either in the form of natural restrictions or legal restrictions. Some examples of these restrictions are patents and copyrights, high start-up costs, and government license and franchise. With the existence of these restrictions, monopolies are able to remain dominant in the market.

A Key Characteristic of Monopoly

Therefore, a monopoly market means that the market supply curve is identical to the single firm’s supply curve and that the market demand curve is identical to the firm’s Average Revenue (AR) curve.

* The figure below shows the monopoly curve.

Cost/Price

D

C

Px

MRx

B

PY

A

MRY

AR=DD

QY

Qx

MR

Output

Types of Monopolies

One of the characteristics of a monopoly firm is the existence of the barriers to entry which is categorised into two different monopolies. The first type of monopoly is a natural monopoly and the second one is termed as a legal monopoly or often called as a government-created monopoly.

Natural Monopoly

A natural monopoly is a distinct form of monopoly that exists when there are high fixed costs of distribution. This means that a natural monopoly exists when there is one firm that is able to produce at a lower price, compared to two or more alternate firms. A natural monopoly can arise due to economies of scale where the larger a firm becomes the lower the cost of production will be for the firm. A natural monopoly arises without the existence of government intervention.

Government-Created Monopolies

A government-created monopoly refers to the type of monopoly that arises due to government actions. Government-created monopolies occur when the government creates monopolies in order to prevent other firms from entering into the market. With similarities to the barriers to entry, government-created monopolies have a few characteristics as well. These characteristics are the government franchise which explains the exclusive rights to a firm to allow them to sell certain goods and services in certain areas, government license which refers to the license or permissions that are needed by firms to operate any kind of business, a patent which talks about the exclusive rights to the production of an innovative product and lastly, the copyright which explains the exclusive rights that are given to firms using materials that are do not originate from them.

The last aspect of a government-created monopoly is the control over raw materials. For example, a good type of monopoly is the DeBeers which is an existing company that deals with diamonds. DeBeers is the only existing company that controls over 80% of the world’s raw diamonds which makes rivalry impossible.

Conclusion

Monopolies are a business structure that can be defined as a business that involves a single seller and a large number of buyers. The properties within a monopoly explains that in a monopoly market, the products that are produced by a firm have no close substitution or in other words, alternate options, and have a high entry and exit barrier. The barriers are those that prevent any form of competition or rivalry towards the dominant firm. Within a monopoly market, there are a few characteristics also that explain the profits that are obtained with connection to the degree of competition faced.

3.0 Introduction to Market Structures

A business market is made up various types of business that operate together either in cooperation or in competition. These market structures are in the forms of businesses that either a large business or small groups of businesses. For instance, there are four types of basic market structures such as the perfect competition, monopolistic competition, oligopoly and a monopoly. These are market structures that are defined by the types of operations that they are involved in and often have certain distinct features about them.

3.1 Perfect Competition

A perfect competition is defined as a market which has many buyers and sellers. In a perfect competition, the products that are sold are usually of the same kind and thus creating a tight competition among firms. In a perfect competition, sellers are able to easily and freely enter or exit the market. Unlike a monopoly which has the barrier to entry, a perfect competition allows seller or producers to enter into the market and compete with either existing firms or other infant firms. A good example of a perfect competition will be agricultural farmers such as vegetable farmers or livestock farmers. In agriculture, competition is usually tight with other individuals or groups existing in the same type of activity. The entry of firm into the field is relatively easy due to little barriers. Within a perfect competition, the products that are produced and sold are usually alike and are often similar to those of the competitors. Another characteristic of a perfect competition is the role of non-price competition. With many firms competing against each other, producing the same or similar products and selling to the similar group of customers, products are often sold at a standard cost thus making it insignificant.

3.2 Monopolistic Competition

Monopolistic competition refers to the market structure which there is a large number of small sellers selling different products unlike the perfect competition which involves the same or similar products. These products that are sold are close substitutes or in other words, alternate options that may replace a primary option. Usually in a monopolistic competition, sellers have an easy entry and exit from the market. A monopolistic competition being on its own has similar aspects that are found in both a monopoly and a perfect competition. For instance, in a monopolistic competition, there are also large numbers of sellers and buyers. The difference is in a monopolistic competition, there are many small firms and therefore these small firms are not able to influence the market price for the products or services. Another aspect is the easy entry and exit of a market but due to the difference in products, entering into the market of a monopolistic competition is not as easy as that of a perfect competition. A firm that wants to enter into the market will have to create a new label that is not being used. The last aspect of a monopolistic competition is the non-price competition. Most competitions will involve their pricing but within a monopolistic competition, pricing isn’t the main objective for competition. Due to the fact that within a monopolistic competition market there are various brands and types of products, the competition is much more concentrated on the products sold rather than the price that is set. This is because the firms in a monopolistic competition will have their own price policy that is needed to be met. Thus, competitors will find ways to not only attract customers but to also convince them to buy their products.

3.3 Oligopoly

An oligopoly is a market structure where there are a few firms selling either standardized or different products. Similar to that of monopoly, oligopoly also has a tight restriction towards the entry of firms into and out of the market. In an oligopoly market, entry into the market is very difficult or near impossible and because of that, some firms are able to earn abnormal profits. Similar to a monopoly, oligopoly markets are also allowed to impose barriers with the purpose to control excess production of output, which is not profitable for oligopolistic firms.

There are a few features within an oligopoly which different from a monopoly. As an example, in a monopoly, there is only a single dominant firm that controls the market and also the price. But in an oligopoly, there are a small number of firms which are big. A few of these firms are those that control the overall industry in an oligopoly market. Usually in an oligopolistic market, firms depend on each other when the market shrinks. An oligopoly is also not restricted like perfect competitions and monopolistic competitions. The products that are produce are both either standardized or differentiated which means that the products produce may be similar to those in other firms or different from others.

Unlike monopoly, there are a number of firms within an oligopoly and this encourages firms to be aware of rivalry and to take note of the changes made by the competitors. Being similar to a monopoly, the oligopoly market also has a few aspects that share the same understanding and meaning. The difference between an oligopoly from a monopoly is their non-price competition. The non-price competition in an oligopoly is split into two types which are the opting for a price cut and the opting for a non-price competition.

3.4 Monopoly

A monopoly is a business structure that has a single seller of a product that has no close substitution or alternatives. In a monopoly, the product that is produce may be produced by only one source and has no alternate options due to the entry barriers. A monopoly market is made up of a single dominant firm that is in control of the market and pricing. Therefore, with no possibility of creating a close substitution, there are certain restrictions for entering or exiting the market.

In a monopoly, the dominant firm is in control of the pricing of the product that is sold. For example, in Malaysia, the electricity bills and tariffs are set by Tenaga Nasional Berhad and then implemented to the citizens. Usually in a monopoly, the entries to the market of new firms are restricted by a few restrictions to ensure that there will not be many competitors or rivals within the market.

3.5 Conclusion

There are many types of businesses that exist that are competing with each other. There are those that sell the same product and those that are targeting the same group of people. In business, there are a few market structures that exist which are the monopoly and oligopoly, the perfect competition and monopolistic competition. The features of a perfect competition and a monopolistic competition are those that are slightly similar. Within a perfect competition, the business is usually in large numbers where there are similar or standard products produced, which is similar to that of a monopolistic competition. Lastly, there are the oligopolistic market and the monopolies which have certain similarities but also posses certain differences. For example, in a monopoly, the business is usually dominant and the firm is the only one in control of the market. Therefore, there is no close substitute and no competition.


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