In this assignment I will identify the structure of markets within the economy and explain how they deviate from the model of perfect competition. I will also expand on which market forces dominate the market place, identifying the organisational responses to demand including the adoption of competitive strategies within the free market. Finally I will explain the role of the competition commission and regulatory bodies.
The most important factor within any market is the number of rivals competing for a share of the business. Competition, as described by Stigler, G (2008) arises whenever two or more parties strive for something that all cannot obtain. Perfect competition is seen as a theoretical ideal and sets the standard for comparison. “Perfect competition exists when a market has many buyers and sellers of the same good. Few markets are perfectly competitive because barriers keep companies from entering or leaving the market easily” (O’Sullivan and Sheffrin, 2007). Perfect Competition is normally unattainable in practice and is often used as a comparative tool by economists to evaluate different markets. In terms of competitive nature, we can classify real world organisations under the following headings, Monopoly, Monopsony, Oligopoly, duopoly and Monopolistic Competition. Monopoly
In the UK, a business controlling 25% of the market is considered a monopoly. According to Stigler, G (2008) a monopoly is “an enterprise that is the only seller of a good or service”. In order for a true monopoly to arise, a company must hold a significant advantage, imposing barriers for entry to prevent others from entering the same market. Holding key resources and patents can make it difficult for another company to break into a market. It is now rare to see true monopolistic organisations, particularly in the private sector however there are some publically owned services that can be categorised as monopolies. In an effort to prevent monopolistic control over markets certain laws have been passed. The fair trading act of 1973 appoints a director general who investigates unfair trade practices and monitors the effects of mergers that may put a company in a monopolistic position. Monopsony
If there is only one buyer for a product then the market is described as monopsonistic in nature, making the supplier wholly reliant on the purchaser. This can result in pressures from the buyer to reduce the purchase price in an effort to increase the product profit margins. Oligopoly
Similar to monopoly, an oligopoly is made up of a small number of large suppliers, all of whom monitor the price of their product closely in an effort to ensure that they do not over or under charge. An organisations failure to manage its prices effectively could result in a loss of the majority, but not all, of its sales. As with monopolies, an oligopoly can only remain as such if it imposes significant barriers to entry. Duopoly
As with oligopoly, duopoly is the description given to a market where two companies act as the supplier of a homogenous good. Both firms must consider the result of any change in prices. Collusion is rare; instead the use of strategic planning dictates how the company will compete with the other.
The closest many organisations come to achieving perfect competition is when their activities result in monopolistic competition. There are many buyers within this kind or market, entry and exit into the market is easy and prices are clearly visible to all. In order to distinguish between perfect competition and monopolistic competition one must note that the products provided under perfect competition are identical; under monopolistic competition they are differentiated. Product preference dictates the sale of the good over price resulting in several non-price actions being necessary to differentiate the products. An example of a good sold under this type of market...