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Differentiating Between Market Structures

By donnamortada Feb 18, 2010 1189 Words
The market structure is defined by the number of firms in the market, the persistence of barriers to the new entry of companies, and the interaction with other firms in pricing decision and the outputs toward maximizing profits. The simulation comes across the four types of market structure within the East-West Transportation Company. Consumer Goods, Coal, Chemical and Forest Products are the four divisions that operate within the four market structures (UOP, 2009). This paper will focus on the advantages and limitations of supply and demand identified in the simulation, the effectiveness of market structures for Staples Company, and how organizations can maximize profits in each of those market structures.

Advantages and Limitations of supply and demandFirst, a decision has to be made whether to maintain or shutdown operations. Continuing with operations in highly recommended in the perfect competition market. In the first scenario the market demand curve is downward sloping, the sellers recognized the individual demand curve facing them to be perfectly elastic at a specific price. With such demand curve and the cost structures in such a scenario, producing and outputting at maximized profit were attempted by sellers.

As stated by Tanya Roy, the law of demand restrains in a monopoly. The coal division operates in the monopoly structure where the demanded quantity is still high even though the price is high and therefore, profit does not need to be high (UOP, 2009). The demand curve is noticeably downward sloping in the monopolist structure. The price could be also higher than marginal revenue; but in the case of output where Marginal Revenue equals Marginal Cost, quantity line to the demand curve could be extended in order to decide on the price that needs to be charged for such an output.

Oligopoly- duopoly in the Chemical Division is the third market structure. Oligopoly is a "market structure in which there is only a few firms and firms explicitly take other firms' likely response into account" (Colander, 2008, p. 282). With Fast Forward Transportation entering the Chemical Transportation business, the East-West Transportation started a competition which makes the company a part of the oligopoly structure. The Marginal Cost curve is merged with the industry demand downward curve and the marginal revenue curve. Finally the Forest Product Division operates in the competition market structure of monopoly. The company that operates in monopolistic competition will have a downward sloping demand curve (Colander, 2008).

Market Structures of StaplesStaples Company is a part of the monopolistic competition. The company carries in its stores a variety of products and mostly focuses on the effect of local competitions on its prices. The company adjusts prices after verifying of the prices in other competitors stores for similar items sold at Staples. The demand curve slopes downward due to the fact that Staples operates in the monopolistic competition. This means that the monopolistic competitor will use a marginal revenue curve that is below price when making decision about output. Marginal Cost will be less than price during maximizing profit of output. In such a market structure the competition involves zero economic profit in the long run (Colander, 2008). Competitors will try to lower the price to increase their profits and beat Staples' prices. This would continue until the profits vanished and the new demand curve is back to the new average total cost curve. The merger of Staples and Office Depot resulted in higher prices because the prices of Staples' items were lower in the areas where office Depot existed (Newmark, 2001).

Market Structure Maximize ProfitsMaximizing profits is the goal of most firms. When marginal revenue is equal to marginal cost, firms can maximize their profits in the perfect competition; this means that additional revenue from additional quantity produced is equal to the additional cost of that produced quantity. At an output where Marginal Revenue is more than Marginal Cost, profit could be increased by increasing production. If Marginal Revenue is less than Marginal Cost, profits increase necessitates production decrease. Hence, the profit-maximization occurs when Marginal Revenue equals Marginal Cost. The price given for each firm should equal the MR in perfect competition since the unit price is the expected additional revenue expected from selling additional quantities. P=MR=MC became the profit maximization condition. Costs are inconsistent in the long run. In a perfectly competitive market, zero economic profit in the long run is ideal more profits encourage more firms to enter the market until market prices would decline and all firms made zero profit (Colander, 2008).

With Monopoly, a monopolist assigns the price for a product to maximize profits. The profit-maximizing is when MC=MR. The output is less than those in the perfect competition. A monopolist might earn economic profits in the long run even if new firms enter the market (Colander, 2008).

In the Oligopoly structure, firms take into consideration the reactions of the other firms while making output and pricing decisions. The set prices by firms are virtually alike since any act of changing prices attempted by one will be imitated by other firms. Therefore, once prices are fixed little changes could happen in Oligopoly. In the long run, Firms can expect to make profit (Colander, 2008).

Many sellers and buyers are in the Monopolistic competition, and few barriers might face the entry of new firms. Each company sells its unique products and insists on differentiating its products from rivals. Maximizing profits of each firm happens when MR equals MC. The opened market entry and exit of firms means that all firms earn zero economic profit in the long run (Colander, 2008).

The simulation was a great experience to distinguish the difference between the four market structures and how those structures operate within East-West Transportation Company. The structure of a market is shaped by the number of companies in the market, the barriers or the easiness in the market, and the reliance on other firms to maximize profits. These four market structures are considered necessary in a perfectly competitive market as an establishment of the framework for the real world.

Comparison TablePerfect CompetitionMonopolyMonopolistic CompetitionOligopolyFirm exampleCorn, Rice - Electricity, coal Fast Food.OilGoods or ServicesNo Differentiation in products; homogenous goods or servicesThere might be no differentiation but there is only one provider of the good or serviceSlight differentiation in goods or services. Slight differentiation in goods or services but less than monopolistic competition.

Barriers to entryNoneVery highMediocreHighNumber of FirmsManyOneMany but less than perfect competition.Countable such as between 3 to 6Price elasticity of demandVery ElasticHighly inelasticElastic but less than perfect competitionInelasticEconomic profitsZero in long run. There might be some profits in the short run.High Economic Profits both in short run and long run.Zero economic profits in the long run. Might be some profits in the short run. Economic Profits in the long run, but less than Monopoly.

ReferencesColander, D.C., (2004). Economics (7th ed.). Irwin/McGraw-Hill, Burr Ridge, Il. Retrieved on April 20, 2009Newmark, (2001). The Independent Institute. Retrieved on April 20, 2009 from: of Phoenix, (2009). Economic for Business. Differentiating between Market Structures. Retrieved on April 20, 2009 from University of Phoenix studentE-resource page.

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