Good Essay On American Public University

Consulting Mayor

1. Describe each market structure discussed in the course (perfect competition, monopolistic competition, oligopoly, and monopoly) and discuss two of the market characteristics of each market structure.
Perfect competition is the market type where every agent in the economy has full information about the market (full information assumption); there is no barrier to entering to or exit from the market (free entry and exit assumption); there are a large number of buyers and sellers (atomicity assumption); and products are similar to each other (identical products assumption). The main idea in the perfect competition market is that no agent or no group can influence the market price. The market price for a specific product is determined through a negotiation between seller and buyers. Because there is no barrier, there are a large number of buyers and sellers in the market. Every buyer and seller have the full information about the market. Therefore, no agent can create a disinformation in the market. Also, every product is similar to each other in the specific market. So, the buyers cannot create an advantage for the competition by differentiating their products. The customers know that the utility they receive from the different brands is similar; therefore, they do not believe the claims of differences between the products.
Monopolistic competition market is a market type between perfect competition and monopoly. The companies in the monopolistic competition market try to make their customers believe in that their products are better than the other companies’ products. The companies differentiate their products to create a difference that is expected to make the customers believe that the products are relatively better. Therefore, the companies have to spend some efforts and financial resources to implement the differentiating strategies. Advertising and promotions are used to convince the customers.
In the short term, the companies might manage to increase the belief among the customers and have some monopolistic power. The companies would like to extend the time that the customers have the positive beliefs for the company’s products. However, the companies have to spend continuously through continuing their advertising and promotions. Continuing these efforts are not feasible for the companies. In the long term, the companies may not continue the differentiation efforts. Consequently, in the long term, no companies try to differentiate their products. As a result of this, in the long term, the market is transformed into a perfect competition market.
Differentiating aims at developing a psychological situation for the specific company’s products. Following this idea, the companies have to develop a differentiation strategy. It is not necessarily true that the company spends more for differentiation gets relatively market share.
Monopoly is the market type that there is only one company as a seller in the market. Monopoly is a kind of non-competitive markets. There exist some barriers for the companies to enter the market. These barriers might exist naturally or be created by the companies or the legal institutions like governments. For entering some markets, the companies might face very high entry costs, and because of that only one company can enter the market and operate. This kind of monopoly is called natural monopoly. The companies might have the financial and the political power to create a monopoly and push the other companies out of the market. Another way of existence of a monopoly market might be due to the some legal regulations. For instance, patents create a temporary monopoly for the inventor company. Sometimes, the lawmakers might create a monopoly in some specific industries. For instance, in many developing countries, the postal services are supplied by one government institution because the postal services are considered as important for social security. Also, the national security services are served by a national institution named as army.
Oligopoly is another non-competitive market type. In the oligopoly market, there exist only a few companies in the market because of the barriers similar to the monopoly market. A few companies might reach explicit or hidden agreements between them, or they might prefer competing. If the companies reach an agreement, and then the market is to be transformed into a monopoly market. If the companies prefer fighting, and then if there is a strong company, this company might push the other companies out of the market. Thus, it is possible to claim that the oligopoly markets are not stable markets. 2. Identify one real-life example of a market structure in your local city and relate your example to each of the characteristics of the markets.
The service industry might be an example of perfect competition. There are many electricians and mechanics in the city. It is not possible to observe a fully competitive market in the real life; however, because there are many mechanics in the city, then it is possible to have a high competition in the market. Also, all the service providers and the buyers of the services have the market information; we might claim that the service industry is close to perfect competition.
The cell phone services industry is an example of oligopoly. Because of the high entry costs, there are only a few companies in the market. We observe that the cell phone companies prefer competing with each other. All they prepare different calling packs at different price levels. However, we might say that the companies have an oligopolistic competition markets because we observe that the companies try to differentiate their products, and they claim that their coverage is larger than other companies' coverage areas.
The municipality services in the city are the example for monopoly. For instance, the water service is only provided by the municipality because for selling water a company has to make a large investment, and only the municipality can afford that high entry cost. Also, the water service does not make enough income for the companies, and they might have a large loss in the market. However, the water service is inevitable for the public; therefore, the municipality pays the high entry cost for the infrastructure and provide the water for the people in the city.
The shopping centers market is the example of monopolistic competition. All the shopping centers provide similar services to the customers with almost the same stores in them. However, the shopping centers invest in advertising a lot, and they try to offer different entertainments and promotion campaigns for the customers. The companies aim at convincing the customers that their shopping center is relatively more fun to visit.
Even if it is possible to give some examples for the specific market types, the examples might be transformed into another market type in the long term. Therefore, it is not easy to name the type of the markets easily. 3. Describe how high entry barriers into a market will influence long-run profitability of the firms.
The high entry costs might create a non-competitive market type. The companies might have to invest in big infrastructures, or the governments might put very high taxes for some industries. The water services are the example of the first type, and the lottery services are the example of the second type.
The companies aim at making high profit as much as possible in the market because they pay very high entry cost. The companies calculate feasibility and the number of years for returning the investments is an essential criterion for the companies. There is a negative relation between the high entry cost and the number of years for returning the investments. Thus, if the entry cost is higher than the number of the years for the return will be longer.
Because of the high entry costs, the private companies might not prefer investing in an industry. Even if the industry makes high profits for the company, it might take long years to return the investments and the private companies might not be patient enough. In this case, if the services provided by this industry is inevitable or has high externalities, and then the government institutions or the municipalities enter the market for the public benefits.
There is no certain relation between the entry cost and the profitability of the business because the entry cost is a kind of fixed cost for the companies. The fixed costs disappear in the long term. However, when the entry cost is very high, and then the disappearance of the high entry cost takes long years, and the private companies might prefer staying away from this market. On the other side, entering a market with high entry cost might give a high monopolistic power to the companies. That means the company might influence the price in the market. Therefore, there might be a chance to increase the price in the market and make relatively higher profits. However, that might not also happen . Even if a company has the full monopolistic power, the company might not be able to increase the prices in the market because being the only company in the market does not guarantee the power to influence the power in the market.
Consequently, each market has its conditions and the markets with high entry costs are required to be assessed with the different characteristics. Each case might have different results. It is not possible to claim that the high entry costs decrease or increase the profitability of the companies in the different markets. High Entry cost is one kind of high entry barriers. Each high entry barrier carries its characteristics. Therefore, there is no certain theoretical information or experience indicating us that the high entry barriers guarantee a high profitability or vice versa. 4. Explain the competitive pressures that are present in markets with high barriers to entry.
High entry barriers might cause high profits or losses in the markets as explained in the previous answer. Thus, we need to develop an answer depending on this information, and there are two different cases: 1) high profitability and 2) loss.
If the companies are making high profits because of the high entry barriers, and then it is possible to have other companies those are willing to enter the market. However, coping with the entry barriers requires spending relatively more for the candidate companies. The companies prepare a feasibility report and evaluate their situations. If they find entering the market feasible, and then the pressure from the new companies outside the market for the incumbent companies becomes relatively higher. Otherwise, the companies might not be willing to enter the market, and then no pressure occurs on the incumbent companies.
If there is a loss in the market with the high entry barriers, the most probably, no company will be willing to enter the market and even it is possible to claim that the incumbent companies might be willing to leave the market. However, the modern global economy brings fast changes to our lives. Therefore, if the conditions change in the markets, even the markets with loss might attract new entrants. Thus, while evaluating a market, the specialists have to take the changing conditions into consideration. In another word, making relative better predictions about the future of the markets can create very big advantages for the companies. 5. Explain the price elasticity of demand in each market structure and its effect on pricing of its products in each market.
Price elasticity is an essential measure for the markets. Price elasticity measures the reactions of the customers to the changes in the price of a specific product. For instance, if the customers are very sensitive to the changes in the prices, and then elasticity becomes relatively closer to "1". Otherwise, it becomes relatively closer to "0".
In the perfect competition market, after the price is determined in the short run, the demand and the market price become stable. All the agents in the market know that, and their price elasticity becomes very close to "1" because any change in the price might get a strong response from the customers. It is possible to see that the elasticity takes values between “1” and “0” in the short term; however, in the long term, the market price is given and every agent expects that it stays same in the long term; therefore, the reaction to changes in the price might be very strong.
In the monopoly, the price might change in the short term and the long term. There is no difference between the short term and the long term because there is only one company in the market. Consequently, we need to have specific information about a market to make a comment on the elasticity.
In the oligopoly markets, we might have competition or agreement between the companies. If they have an explicit or implicit agreement between them, and then it becomes very similar to monopoly. If there is a competition in the market, and then it is possible to have a high elasticity in the market because the customers might benefit from the competition in the market.
In the monopolistic competition, it is not possible to make a comment on the price elasticity because the changes in the elasticity depend on the strategies followed by the companies. However, in the long term, the market becomes much closer to perfect competition; therefore, we might expect relatively higher price elasticity in the market.6. Describe how the role of the government affects each market structure’s ability to price its products.
Government is the strongest agent in the economy because of the public power it receives due to being elected. Therefore, the governments in almost every country can regulate the markets and determine the market prices. However, in the developed countries, it is not a preferred way. However, during economic and financial crises, we observe that the governments can force some conditions to the markets, and that influences the market prices.
In the developed countries, the governments are expected to help the markets run efficiently. Thus, when there is a structural problem in the markets, it is expected that the governments intervene the markets.7. Discuss the effect of international trade on each market structure.
International trade increases the competitive pressure on all type of markets because every service or product might be produced in another company with relatively lower costs or higher quality. Therefore, if a country involves with free international trade, and then the foreigner companies might be willing to enter the domestic markets or some importing companies might be willing to import some products from the other countries to enter the markets.
Consequently, opening the borders for free international trade increases the competition level in almost every market. However, some markets with high entry costs and high externalities might still not be profitable enough. Therefore, these kind of markets might not be influenced by the international trade.

References

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