Explain the Different Types of Market Structures
There is a spectrum of markets structures that exist. At one extreme you have the monopoly structure, where the market is dominated by one company with little competition. At the other end of the spectrum you have perfect competition, where the market is made up of about 100 small companies who would own about 1% of the market each. Towards the middle of the spectrum you have the oligopoly structure where the market is of about 4-10 companies who each control a big chunk each.
Perfect competition describes how a set of companies aren’t big enough to control a big chunk of the economic market. There are 4 market characteristics of a perfect competition include a large number of small firms, identical products made sold by all firms, easy to enter and exit the industry market and perfect knowledge of prices and technology.
The price in a perfect market is always dictated by the consumers, the output or quality is determined by the producers.
There isn’t much room to change prices to beat off competitors as your margins become very small, and if you do not sell much you probably won’t break even. The quality may be a little different, but wouldn’t be significant enough to let the company grow. 1 example of a perfect market is the currency market. Currency trading is active 24 hours a day, 5 days a week.
The main companies involved in trading are banks, hedge banks, corporations and private traders. There is always a homogenous output as no matter what, a yen is a yen and dollar is a dollar. To determine the prices of the currency, large numbers of buyers and sellers will meet openly to determine prices, each of the major banks has a foreign exchange trading floor where they can make the prices. Buying and selling has become easy, especially looking for the best prices as you can look on the internet to compare. Another example of a perfect market is a farmers market.
The farmers market has lots of small firms or farmer’s, each of the farmers has a very small percentage of the market. The buyers collectively control the price and the sellers must find the price that the consumers are willing to pay, if it’s too high, they won’t go there. It is also very easy to obtain the perfect knowledge of the market, as all you would have to do is walk around and look at each stall. If the seller prices the product to low, they might not make any profit. In a farmers market, the setup level wont be much, or the rent of the stall. This makes entering and exiting the market very easy. Also at the farmers
market, the products will be homogeneous as all of them will likely grow the same sorts of fruit and veg.
The monopoly market is a market where one firm controls the entire output for that market. However, in the UK, to become a monopolist you need to control 25% of that market. A monopoly usually has one very large seller, with a lot of individual buyers. As the company controls 100% of that market they can determine the price, although authorities may be able to limit them. In a monopolist market, the output is controlled by the consumers and the price is controlled by the monopoly company. One example of this is Welsh water, which is Wales’ entire water supplier.
They have complete control of water. Although they own 100% of the market, they cannot however charge what they want to, OFWAT regulates all prices. One of the main reasons Welsh water owns the entire market is because the entry barriers are massive, water work setups cost billions, and even then they aren’t guaranteed to bring that money back as they may not be able to break Welsh waters market share. Welsh waters product is very limited as they can only really supply water and the sewage systems, economic efficiency is limited because of OFWAT that can regulate prices. Innovation&comp.
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