It is important that firms know what type of market they operate in. This is known as market definition. The type of market that a firm operates in will affect it pricing decisions, promotion strategies and how to create a competitive advantage over the other firms in order to get a higher market share. This is made possible by the fact that, a market structure displays the most important elements in the market (Perloff, 2008). In this case, a market is defined as how suppliers and demanders interact in order to determine prices of goods and services. Market structures are determined by the number of suppliers in the market, the commodity they are supplying, whether goods or services, the ease of new suppliers entering or leaving the market, the number of consumers in that market and the capability of a single supplier in that market to influence the price of the commodity being provided. This paper, will discuss the market structures evident in Australia.
The following are the four market structure that are evident in the Australian commercial world. They have been discussed in detail.
Monopoly Market Structure
In a monopoly market structure there is one supplier or firm which acts in an unconstrained manner. The firm is the price determinant and controls a large part of the market share. The firm is called a monopolist (Samuelson, 2003). Where there is only one buyer for produced commodities, then the buyer is known as a monopsony. Although in economics, a monopoly would be characterized by only one firm in the industry, in law, a monopoly can be viewed as any firm which controls a large percentage of the market share, can influence the prices of the market and where other firms in the market cannot effectively compete against that firm due to its economies of scale. Examples of firms in the Australia which are monopolies are Telstra, Australia Post and Energy Aus.
The monopoly market is thus characterized by;
Very low or no competition- where the firm is the only supplier in the market then it will have no competition and where there are other firms but they cannot effectively compete against that firm.
Barriers to entry into the market- in perfect conditions, monopolies would be difficult to develop. In a monopoly, new firms are barred from entering into the market making the monopolist to be the lone firm in the market.
One Main supplier of the commodity dominating the market in an industry- there is only one main supplier, who is termed as the monopolist. This supplier has the ability to control the prices of a commodity making it difficult for other suppliers to compete favorably if at all they exist.
No available substitute of the commodity- in this case, the commodity being provided the monopolist has no near substitute. In Australia for example, Energy Aus. Provides power which has no substitute.
Firms can turn into monopolies where the following conditions are met (Pindyck, 2001),
Integration- this can occur either horizontally or vertically. In horizontal integration, firms gain monopoly by joining together at the same stage of production. A good example is where banks join together to from one large bank. In vertical integration, a firm will become a monopoly by gaining control of other stages in the production of that commodity. A firm that produced mutton for example, can rear sheep, butcher them and process them into canned mutton.
Patents- patent protect intelligent and production rights. A firm which gains a patent to produce a certain commodities will bar any other firm from entering the market since it has sole ownership to production rights. In most cases, monopoly gained by patent are temporary since patents expire.
Sole ownership of resources- where a firm solely owns all the resources needed to produce a certain commodity such as raw materials, then it will bar any other firm from entering the market.
Economies of scale- a firm which has economies of scale has the ability to run huge promotion campaigns, undercut prices and engage in research and innovativeness. This makes the firm fiercely competitive and to own a large part of the market share. This can drive other firms out of the industry if they lack the competitive advantage.
Being the first firm in the market- companies which operate in Australia such as Coca Cola and Google, are termed as monopolies since they were the first entrants into the Australian markets in their respective industries coupled with other factors. Since they already developed brand loyalty and this makes it for other firms to join the industry.
Government Action- the government may find it necessary to have only one firm in the market supplying a certain commodity. When the government does so, then t will proceed with giving only one company the rights and the license to offer that commodity. This will bar other companies from joining the industry since they cannot be given the license to operate. In most cases, these are companies which offer public services such as tapped water to homes and electricity. A good example in Australia is the Energy Aus. And Australia Post.
Since the monopoly controls the whole market, it may seem unnecessary to make promotional campaigns or advertisements. But this is not the case, most monopolies advertise and take part in promoting their products. However, the main aim of monopolies taking part in campaigns is to control the market and to maintain the product uniqueness (Goodwin, Nelson, Ackerman, & Weisskopf, 2009). In most cases, this is to remind the consumer world that it is the only legitimate producer of said commodity. The following is a diagram of how a firm can maximize its profit in a monopoly.
The monopoly can maximize profit if it reaches a point where marginal revenue (MR) from sale of all output, will be equal to Marginal cost (MC) of production. From the diagram, this can be reached when the company produces Qm of commodities and sells them at price Pm.
Unlike the firms in the perfect competition market, to achieve maximum profit, a firm would have to make sure that the products produced, will be fully consumed in the market. This is so since, if a lot is produced, then there would be nowhere to take the surplus since the company by itself, is serving the whole market. This may lead to losses. To reduce such an effect, monopolies increase the price of its commodities, and then reduce the total output depending on the demand supply curve.
Monopolists have the ability to price discriminate depending on the market that they serve. In this case, the monopolist divides the market into regions depending on the financial capabilities or tastes and preferences of the consumer and either reduces the amount, quality or price of commodity being given to these market regions. If the market is termed as elastic, then it will reduce the price to increase sales and if the market is inelastic, then it would reduce the quantities produced and offer them at a higher price so as to maximize profit.
Monopolistic Market Structure
This is a market structure which is the opposite of Perfect competitive market. In this market, the competition is imperfect since there exists many suppliers, who have a very good knowledge of the market selling differentiated commodities to many consumers who have very good knowledge of the market (Cline, 2005). The products are differentiated by either branding or quality. This makes the commodities not to be perfect substitutes of each other. The theory of monopolistic competition was introduced by Edward Hastings Chamberlain.
A monopolistic competition will have the following characteristics.
There are many suppliers in the market who are not fully knowledgeable about the market and many consumers in the market who are not fully knowledgeable about the market. This makes the decisions and choices made by both consumers and suppliers to fully informed.
In the consumers mind, they believe that there is no real difference in the prices offered by the many suppliers. In most cases, a firm will ignore the prices put up by rival suppliers and go on to put up its own price which it believes the sales made and at the same time increase the profit margin
There exists barriers to entry and exit into the market. However these barriers are not as pronounced as those in the monopoly market structure. They are few and very unlikely to affect the competition in the market.
In the long-run the characteristics of a monopolistic market will be similar to those of the competitive market (Kreps, 1990). The greatest difference that exists is that in monopolistic market, firms have a certain degree of control over price, the commodities produced are heterogeneous. In monopolistic markets, most of the competition is not on the basis of price but differentiation. Firms in this market will promote their products by telling the consumer how their products are better compared to its rivals rather on how they are cheaper.
The following diagram shows the short-run equilibrium of a firm operating in a monopolistic market.
In the short-run, the firm is able to increase its output and sales to a point where Marginal Revenue (MR) is equal to Marginal Cost (MC). In this case, the firm can determine the price it is to sell at, depending on the average revenue, (AR) curve. The total profit of the firm will be given by multiplying the difference between the average cost (AC) and average revenue (AR) by the total amount of commodities sold (Q), .
The following diagram shows the equilibrium of a firm in monopolistic competition in the long run.
In the long run, the company will have no economic profit as shown in the above diagram. This so since, although the firm might still be able to produce and sell all the output where Marginal Revenue (MR) is equal to Marginal Cost (MC),. The average revenue (AR) curve and the Demand Curve (D) will have shifted. This will be coursed by the fact that new firms will have entered the market and the competition will have increased. Where the above conditions are met, then the firm can no longer sell at a price which is above Average Cost (AC) making the firm to get no economic profit (Cline, 2005).
Examples of industries that experience this type of competition in Australia are, toothpaste, soap and detergents, mobile manufacturing industry (Smartphones) and toilet papers. In these industries, all the firms provide the same commodities in their respective industry by differentiation. The manufacturers would change either, the composition of the product, aesthetics of the product, packaging of the products and having fierce promotion campaign claiming that their products are the best there is. Monopolistic market structure is the most realistic in Australia.
Oligopoly Market Structure
In an oligopolistic market structure, there are generally a few suppliers in the market. These supplies control a large share of the market. In such a situation, the different suppliers observe each other and often, decisions will be based on the actions of rival suppliers. The action of that firm too, will affect the actions of other firms (Boyes, 2002). This means that, management of firms which operate in an oligopolistic make decisions, they should consider the likely responses of other rival firms. The products in an oligopoly might be homogenous, e.g., aluminum sheets or slightly differentiated such as automobiles. The game theory is highly used to evaluate the likely responses of other firms. A firm which operates in an oligopolistic market for example, is unlikely to use price to create a competitive advantage since price wars will prove detrimental to all who will be involved in such a war. Examples of an oligopolistic market in Australia is the car manufacturing industry with some of the biggest players being Toyota and Ford companies and the cigar rete industry which has British American Tobacco.
The following are the characteristics of an oligopolistic market (Binger, 1998).
Ability to control price- in an oligopolistic market, the demand does not set the price. This means that the firms are the price makers not the price takers.
Few Barriers to entry and exit into the industry- there exists barriers to entry into the industry. In most cases, these barriers are in form of government regulations such as giving of operating licenses, economies of scale making it difficult for small firms to join the industry, patents, restricted access to technology due to factors such as capital, and sometimes the strategies used by the firms already in existence which seek to limit the number of new entrants into the market.
Interdependence- this is certainly the feature that differentiates this type of market structures from others. Since this market setting has a handful of firms in the market, the actions of one firm affects the whole market. This means that a firm cannot do something without the other firms noticing and coming up with strategies that will respond to this action accordingly. In this scenario, a firm will make decisions based on the assumed reactions of other firms.
Non-price competition- since the action of one firm leads to reaction by other firms, oligopolies will restrain from engaging in price wars. To create a competitive advantage, the firms will dwell more on retaining customers, creating product loyalty and product differentiation.
The Kinked demand curve model is used to explain the effects of a company in an oligopolistic market changing the price of its commodity. The following is a diagram explaining the model (Primeaux, 1976).
From the diagram, if a certain firm raises the price of its commodity above the equilibrium price (Ep), then rival companies will not increase their prices, this means that it lose some of its customers leading to the flatter demand curve.
If the company reduces its price below the equilibrium price, the benefits would be short lived since other firms will also reduce their prices so that they can maintain their market share, this means that the firms output will only increase marginally. This makes the price to be rigid.
The marginal costs can fluctuate from MC1 to MC3 without necessarily changing the equilibrium price or quantity.
In Australia, some perfects example of oligopolistic markets are.
The media industry where the main firms are News Corporation, Time Warner and Fairfax media. These companies own most of the media outlets in Australia.
Grocery retailing is also another industry. The main grocery retailers are Coles Group and Woolsworth who controls a large market share.
The banking sector in Australia is dominated by four banks. The ANZ, NAB Commonwealth Bank and West pac. This is a perfect example where government has created barriers to entry in the industry hence creating an oligopolistic market. This regulation seeks to ensure that the banking system of Australia is stable.
The telecommunications industry is also another good example of monopolistic market in Australia. The industry has three main players who are Telstra, Optus and recently NBN co. which control the fixed line sub-industry. In the mobile subsector we have Telstra, Optus and Vodafone Hutchison Australia.
Perfect Competitive Market
Comparing with all of the above market structures, the perfect competitive market has the highest level of competition including price wars (Kreps, 1990). A perfect competitive market is advocated for by neo-classical economists sighting the numerous benefits it has for the consumer. In this market, firms are the price takers since the bargaining power rests with the consumers. Consumers have a wide varieties of commodities to choose from due to the high number of firms in the market. Companies will therefore take the prices as given by the forces of demand and supply in the plight of losing customers and still wanting to maximize profits. This is so since, if the firm was to set a high price then customers will opt for other products from different companies which are selling at lower prices and if the company was to set the price below the market price, then it would lead to reduced profits and revenue (Primeaux, 1976).
A competitive market structure is characterized by the following factors.
Low degree of entry or exit into the industry- firms can join or leave the industry as they wish. When there are only a few firms, then the industry will be lucrative and attract more suppliers, when too many suppliers have joined the industry, then profits become low and those firms which cannot compete favorably leave the market.
Homogeneity of products- the products produced by firms in this industry are homogeneous and highly substitutes for each other. This makes it easy for consumers to shift from one product to another. Depending on availability and price.
Suppliers and demanders have perfect knowledge about the market forces in regards to demand and supply and therefore able to make rational decisions since they have enough information
No single buyer or seller can influence price- price is determined by market forces of demand and supply. It would be difficult for a single firm or buyer to determine the price of the commodity.
In perfect competition, a firm can only increase the total profits by selling more while keeping costs at minimum possible and controlling a bigger market share. The total revenue will be calculated by multiplying the total units of produce sold and the selling price of those commodities in a specific period. The marginal revenue will measure the increase in revenue due to an addition of one unit sold.
The following diagram shows profits in competitive markets.
In a perfect competition, the total revenue of the firm is obtained by multiplying the selling price of a product with the quantity of products sold during a concerned period. On the other hand, marginal revenue indicates the additional increase in revenue due to additional increase in the production level. However, marginal costs can vary depending upon the production level. This means that it is highly unlikely for firms to make abnormal profits in the long run in such an environment. This is not to mean though, that making abnormal profits in the short run is not possible.
In the real world, perfect competition rarely exists but rather, approximations are made. In Australia, the best depiction of perfect competition is the betting industry. If clients were betting in for example a car race, they would simply look at the racers and they will know who has the highest probability of winning. The clients will then go to the different bookies to determine who is offering the best odds for that racer. Bookies on the other hand know which racer has the highest probability of winning and will give that race the least odds. Since consumers will go to the bookie who offers the best odds, no bookie would offer a bad odd, they are simply price takers.
In Australia, three main market structures are highly evident. These are Monopoly, Monopolistic, and Oligopoly market structures. Firms, in their life span, have the ability to jump from one structure to another. This can be caused by Government regulations, changes of the commodity being sold, existence or non-existence of competition, and of changes in the interests of the consumer that commodity. These generally change the characteristics and how the market is organized. Government intervention or regulations for example can either create a monopoly or introduce other firms in to the market thereby making monopolies to lose their influence.
Binger, B. &. ( 1998). Microeconomics with Calculus, (2nd ed.). Addison-Wesley.
Boyes, M. &. (2002). Microeconomics (5th ed.). Houghton Mifflin.
Cline, A. D. ( 2005). "A Consumer Behavior Approach to Modeling Monopolistic Competition. Journal of Economic Psychology , 26(6), 797–826.
Colander, D. C. (2008). Microeconomics (7th ed.). McGraw-Hill.
Goodwin, N., Nelson, J., Ackerman, F., & Weisskopf, T. (2009). Microeconomics in Context (2nd ed.). Sharpe.
Kreps, D. ( 1990). A Course in Microeconomic Theory . . Princeton.
Perloff, J. (2008). Microeconomics Theory & Applications with Calculus . Perloff, J.
Pindyck, R. &. (2001). Microeconomics (5th ed.). Prentice-hall.
Primeaux, W. J. (1976). . "Pricing Patterns and the Kinky Demand Curve. The Journal of Law and Economics, 19(1), 99-189.
Rothschild, K. W. (1947). Price Theory and Oligopoly. The Economic Journal ., 57(227), 299-320.
Samuelson, W. &. (2003). Managerial Economics (4th ed.). Wiley.