What are the four Market Structures?

This hub defines the four market structures, and addresses the following:

1) The advantages and limitations of supply and demand identified in the simulation?
2) The market structure of a sample organization (Heather's Crew).
3) Evaluates the effectiveness of this structure for the sample organization.
4) Analyzes how organizations in each market structure maximize profits.

Market Structures

East-West Company operates in several market structures. Each market structure has both advantages and limitations of supply and demand. In monopolies (and monopolistic competition), and perfect competition, profits are maximized where the marginal revenue is equal to marginal cost. However, in oligopolies and duopolies strategic prices are set almost identically to competitors. Unfortunately, in perfect competition and monopolistic competition the typical long-term economic profit is zero. Though East-West Company operates in several market structures; smaller companies, like Heather’s Crew, typically operate in only one type of market structure. They must consider supply and demand while analyzing the best way to maximize profits.

Monopolistic Market Structure

In an ideal monopolistic market structure, barriers exist that prevent competition from entering the market. A monopoly is a company that is the single seller in a marketplace. The East-West Coal Division has recently become a monopoly due to the exit of its major competitor. The law of supply and demand has many advantages when a company enjoys freedom from competition. Because a monopoly has price elasticity, and control over supply, the East-West Coal Division is able to set the supply at a point that will maximize profits without much change in demand. In an oligopoly or duopoly, the law of supply and demand has limitations. In this type of market, pricing must be strategic and competitive with other suppliers in the marketplace. In markets with perfect competition, demand is low and companies may have difficulty setting marginal revenue at marginal cost while enjoying sufficient demand. As each new competitor enters the marketplace, demand diminishes and profits often do the same.

Oligopoly Market Structure

Though some large companies, like East-West Company, may exist in several markets, companies usually exist in a single market structure. The company Heather’s Crew fits into the oligopoly market. Competition drives prices down, and few strong points of differentiation are present. Each company tries to focus on the materials used, worker experience, warranty value, and quality of work. Still, as each company gains a competitive advantage other companies in the roofing market quickly work to offer the same sales points. Demand is stable in the roofing market, and if competition were not so overwhelming, the price would be elastic. The competition, however, enables consumers to bargain for price and takes the pricing advantage away from the supplier.

Duopoly Market Structure

As previously explained, companies like Heather’s Crew that provide services in an Oligopoly, or like the East-West Chemical Division which provides services in a duopoly are forced to set prices at rates almost identical to the rates of competitors. This pricing strategy is strategic, and factors in anticipated future pricing of the competition since the only information available is the past and present pricing of other companies in the market. Monopolies, in contrast, have price elasticity and are able to set the production and price where marginal revenue is equal to marginal cost while still enjoying a high level of demand. In the example of perfect competition give in East-West Cost’s consumer goods division, price is equal to marginal revenue, which is equal to marginal cost. In monopolistic competition, “the profits of each firm are maximized at the point where marginal revenue is equal to marginal cost” (Colander, 2008). Because in monopolistic competition the differentiation creates a form of monopoly in demand, these companies enjoy some elasticity in price.

Perfect Competition Market Structure

Conclusion
East-West Company has divisions that operate in each major market structure. The forest products division is a monopolistic competition because each firm works at differentiating its services. This does not eliminate the competitive nature of business, but does give some price elasticity to companies in this market. As in most market structures, profits are maximized at the point where marginal revenue is equal to marginal cost. Each market structure encounters limitations, yet companies in most market structures can use the law of supply and demand to their advantage. The East-West Chemical Division operates in a duopoly where strategy based on assumptions of competitor behavior weighs heavily in pricing decisions. Heather’s Crew operates in a competitive oligopoly market. Because few significant points of differentiation exist, consumers have control over pricing, which makes the price of services provided inelastic.

References
Colander, D. (2008). Economics. (7th ed.). New York: McGraw-Hill/Irwin