The Types Of Four Market Models

1017 word (4 pages) essay in Economics

5/12/16 Economics Reference this

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In the business environment the participants in the various markets are either price takers or price makers. Price takers are those participants who do not have a say in the prices that dominate the market while price makers are those that help set the prices that exists in the market. Sellers or buyers have the capability of being either but in most cases the buyers are the price takers. This is because, they do not normally have control over the prices that exist in the market. It is therefore the objective of this paper to compare four of the market models and give a description as well as an opinion on each of these models.

Pure competition is one of the market models found in a free market environment. It consists of many sellers and buyers who trade in standardized goods and services that are sold at prices set by forces of demand and supply. In addition, there is free flow of information between the buyers and sellers with the sellers having knowledge of products prices. Moreover, “New firms can freely enter and existing firms can freely leave purely competitive industries. No significant legal technological, financial, or other obstacles prohibit new firms selling their output in any competitive market” (McConnell,p 150). It bears noting that the firms do not have control over the prices that prevail in this market hence they are price takers rather than makers. Additionally, the products in this market are virtually identical and this makes it difficult for the firms to sell the products above the prices that prevail in the market. They also cannot sell below the market prices as this would lead to a loss of revenue and profits making them uncompetitive.

Monopoly power is a market environment that is characterized by one participating seller who dominates the entire market and influences the prices that prevail in the market. The existence of a monopoly is usually identified as a failure in the market as the seller is a price maker and influences price lay down by other firms irrespective of their location, number or size. A monopoly firm is identified as a seller who is able to provide a significantly large number of products into the market enabling it to control the entire market. Besides, the monopoly has the power to raise the prices of both goods as well as services and still be in a position to retain its customers. Consequently, buyers are left with the choice of either obtaining the products at that price or go without them.

Another form of imperfect competition is the monopolistic competition that is characterized by several small firms which produce and sell products that are differentiated from each other. The products in this market are close substitutes and it becomes very easy for the buyers to interchange them. It is note worthy that monopolistic competition is a hybrid of pure competition and monopoly power in that, there are many firms similar to the perfect competition but the firms have control similar to that of monopoly firms. The firms behave like monopolies though none of the firms have complete control over the market. “A pure monopolist has no immediate competitors because certain barriers keep potential competitors from entering the industry”(190) . The monopolistic competition differs from pure competition in that the sellers who exist in the market compete with each other while maintaining very high profits as they control the prices. Later as the market grows more sellers join the market and the competition grows leading to a reduction in prices. As a result, the demand for products in each of the firms reduces and the firms are subsequently able to retain their customers through brand loyalty. Furthermore, they can therefore raise their prices without loosing their customers.

Oligopoly refers to a market structure that is characterized by the existence of few but relatively large firms who dominate the market controlling the prices. “The same barriers to entry that create pure monopoly also contribute to the creation of Oligopoly”.(217) The large firms act together like a cartel when eliminating competition as they also compete with each other. It is worth mentioning that the market structure has very few sellers who are very large and they sell identical or highly differentiated products. Examples of companies that are considered to be oligopolies are those in the computer, television broadcasting and pharmaceutical industries.

In my opinion some of the market structures especially the monopoly market structure and the oligopoly are failures of the markets as they are not favorable to either the buyers or sellers in the market. Monopoly firms are considered to be illegal whereas the oligopolies are considered to be natural in the markets. When the goods in either of these markets are considered to be essential and necessities for the buyers it becomes unfavorable for the buyers as the prices set are not pocket friendly. The barriers that exist in these market structures are not favorable as they also tend to oppress the small firms that try to enter into the highly dominated markets. The firms involved in these structures tend to be inefficient since they do not face a lot of competition that make them cut down their costs and produce optimally.

Pure competition market structures are the best market conditions to have as they allow for fair competition and efficiency of the markets. The buyers also get prices that are friendly and they have different choices in the market since there are very many sellers producing the same products. They have the freedom to enter and exit the market as they do not experience high costs during entry and exit. They also tend to enjoy normal profits in the long run. However the main disadvantage of this kind of market structure is that the sellers do not have sufficient funds to invest highly as they make just enough profits to maintain themselves in business. Firms do no therefore invest more in designing their products better to attract more customers.

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