ECO/365 Principles of Microeconomics
April 21, 2013
Differentiating Between Market Structures
There are different classifications of markets and the structure of a business determines which classification it will fall into. Markets are divided according to the composition of the business and what it provides to the specific market. Business composition is determined by the structure of market characteristics, and this helps determine level and area of competition. The characteristics in a market with the most concentration focus on number of purchasers and retailers, level in which a product has a substitute, price, entry and exit ease, and the level of mutual dependence. These structured variables are classified in the following market structures: perfectly competitive markets, monopolistically competitive markets, monopolies, and oligopolies (Colander, 2010). Trader Joe’s is a grocery store that offers upscale grocery fare such as; organic produce, nutritional supplements, and health foods. Trader Joe’s was founded by Joe Coulombe and started in 1958 as a small chain of convenient stores in Greater Los Angeles Area called Pronto Markets. Since then, Trader Joe’s has expanded and now has around 375 stores in 30 or more states ("Trader Joe's Company Competition, 2012). Trader Joe’s market may be viewed as a monopolistic competition, and falls into the grocery industry. A monopolistic market structure is characterized by many companies selling a distinct product in a market easy to enter. This market structure is similar to pure competition, except for the distinct product (Kowitt, 2010). These market structure classifications are based on the number of barriers and firms to access the market as outlined in Table one below. A perfectly competitive market exists when every contributor is considered a “price taker”, and none of the contributors influences the price of the product it sells or purchases. Two examples of a perfectly competitive market would be milk and gas. There could be many suppliers of both products, and if one supplier wants to raise their price higher than the price the market determines, consumers will go elsewhere to purchase the item in need. Other characteristics could include: zero entry and exit barriers, zero transaction costs, profit maximization, homogeneous products, and perfect factor mobility (Colander, 2010). In a competitive market price is determined the quantity of product, marginal revenue, and the marginal cost. If the marginal revenue is higher than the marginal cost then the firm can set the price based on those numbers. If the marginal cost outweighs the marginal revenue, then the firm begins to lose money. The firm is looking for the right number that will maximize profits by having a higher revenue than cost. The firm maximizes profits based on output by determining the balance between marginal cost and marginal revenue. If the firm’s marginal revenue is higher than the marginal cost the firm will increase the output to reach the balance. A firm with a higher marginal cost, the marginal revenue will then reduce the quantity output until it reaches the balance. If the firm has reached the revenue equal to the cost at a set output, then the firm has maximized profits based on output. Barriers to entry are considered low as only a small investment may be required to enter the market. The role that competitive market plays in the economy is it tries to maximize profit, which equals total revenues minus total cost (Colander, 2010). Trader Joe’s strategic plan is making customers an integral part of creating the shopping experience, and providing customers a unique, interesting, innovative shopping experience as well as providing products that great tasting, hard to find, and from around the world. This has made it possible for Trader Joe’s to differentiate themselves from their closest...