M2 Instructor Responce
Assignment 1: Discussion—Market Structures
Industries can be classified under different market structures and this classification strongly dictates decisions made by managers within the market. For example, in an industry classified under perfect competition, or in a perfectly competitive market, many competitors offer the same product and entry into the industry is easy. In this market, the pressure to maintain the same prices as the competitors is high, which characterizes this market.
On the other extreme, some industries are classified as monopolies and some fall under monopolistic competition. In a monopoly, there is only one provider of a product or a service, which has an inelastic demand. In this case, there is little incentive for the monopoly to be efficient or price competitive. In a monopolistically competitive market, there are many firms selling a product or service that is only slightly differentiated from one another, and in the long term, these firms start showing characteristics of a perfectly competitive market.
Find an article about an industry in the United States, such as the pharmaceutical industry. You can consult sources such as the Wall Street Journal, Financial Times,Bloomberg Markets, the Economist, US News and World Report, and other publications for your reference.
After reading the article, respond to the following:
- Identify the market structure that best characterizes the industry described in the article.
- Explain the factors you considered when identifying the market structure for this industry.
- Analyze whether this industry will work better if it changes its market strategy and starts showing characteristics of another market structure.
- Critically analyze the advantages and disadvantages of the market structures that you studied in the readings.
The article ‘everyone wants to rule the world’ about the google company takes of characteristics of a perfect market. The features of the market that make it be categorized as perfect competitive industry include. First, significant firms are producing similar product s, for example, Google Company and Amazon Company. Secondly, sellers offering identical products. The case of the search industry the two firms are both search engines which give the same level of satisfaction. Thirdly many buyers and sellers are aware of the condition of the markets at any given time. When one search engine is slower on its service, the buyers will just switch their loyalty to an alternative firm without any problem. Lastly, the market is free to the new entrants and the old firms are also free to exit when they feel they are not making profits (Fabozzi & Modigliani, 2003).
In determining the market structure of the industry, there are several factors to consider coming to a rational conclusion. First, the number of the manufacturers have to be considered and their volume of operations. For the perfect market, the firms have to be many and of equal abilities. Secondly the number of buyers. There are markets where the buyers are few, meaning that the volume of production is also low. In the perfect market, the buyers are many, and the action of an individual buyer does not affect the operations of the market. The third aspect is the knowledge of the buyers and the sellers. It is only in the perfect market where the sellers and buyers have an accurate understanding of the market operations. The last is the flexibility or the rigidity for the firms to join or leave the industry. In the perfect market structure entering and leaving is the firm’s choice (Boyer & Moreaux, 2015).
The industry would perform better if it operated on the oligopoly market structure. In the oligopoly market structure, it only requires few large firms where the Google Company and Amazon Company will battle in the market by themselves. Currently, the two firms control over 75% of the industry which is a typical characteristic of oligopoly. The existing firms can agree to set prices of their products thus acting as a monopoly to make maximum benefit from the sales from the two firms. Apart from the prices, the firms can agree on the distribution channels so that they reduce the cost of production and as a result increase in its profits. The setting of prices is always done to reduce the chances of customers hoping from one service provider to another because of difference in costs (Fabozzi & Modigliani, 2003).
The perfect market structure helps the buyers to get a variety of goods and services since the firms producing similar products are many. All the stakeholders have the best knowledge of the market thus no exploitation of customers. Prices are fair, and the firms do not get super profits from the clients. On the contrary, firms do not enjoy economies of scale due to a large number of companies producing identical products. The products are similar thus it is not possible to have a loyal customer of the firm’s products. The firms are operating at their best and are not willing to advance in technology since it does not translate to higher profits (Boyer & Moreaux, 2015).
Boyer, M., & Moreaux, M. (2015). Perfect competition as the limit of a hierarchical market game. Economics Letters, 22(2-3), 115-118. http://dx.doi.org/10.1016/0165-1765 (86)90215-6
Fabozzi, F., & Modigliani, F. (2003). Capital markets. Upper Saddle River, N.J.: Pearson Education International.
You mentioned that the industry would operate better if it operated as an oligopoly, how do you see an industry changing its characteristics? Can a company move to a different industry?
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