As each of us wake up every morning, there are specific items that we need to have in order to live our daily activities. Most of us began by having breakfast, getting ready for work; go to our jobs, and so on. Freight transportation is an essential part of how all of the necessary items reach our homes and make our lives much easier in order to live our lives. The freight transportation is an essential part on moving this country’s or for that matter any country’s economy.
Any commodity has a chain of transportation and distribution that delivers to their customers. There are various markets in which a freight transportation company operates. These include perfect competition, monopoly, monopolistic competition, and oligopoly. For each of these markets we are able to identify and interpret cost and revenue curves. In the “Differentiating between Market Structures” simulation we were able to see all of these factors; as well as able to see the advantages and limitations of supply and demand for the different market structures.
The first structure that was discussed was the Perfect competition. Here the Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. “Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand. Therefore, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any influence” (Investopedia, 2006).
For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits. Another market structure is called a monopoly. It is a market structure in which there is only one producer/seller for a product. In other words, the single business is the industry.
Entry into such a market is restricted due to high costs or other obstacles, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity. Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry.
However, it is true that a firm with a monopoly has “price- setting power” and will look to earn high levels of profit; these firms are constrained by the position of its demand curve. Ultimately a monopoly cannot charge a price that the consumers in the market will not bear. In addition to these two market structures, monopolistic competition is also one of them. Monopolistic competition differs from perfect competition in that production does not take place at the lowest possible cost. Because of this, firms are left with excess production capacity. The characteristics of a monopolistically competitive market are almost exactly the same as in perfect competition, with the exception of mixed products, and that monopolistic competition involves a great deal of non-price competition. This gives the company a certain amount of influence over the market; it can raise its prices without losing all the customers, owing to brand loyalty, in contrast to perfect competition, which has a perfectly elastic demand schedule” (Investopedia, 2006).
However, this situation does not exist for very long because as other firms notice that there is profit to be made, they will enter the market as there are no barriers to entry. On the other hand, if firms are actually incurring losses, then they will exit the market. This fluctuation in supply will continue until firms are making zero economic profit but firms would still probably record accounting profit and the quantity demanded is at the point on the demand curve where price equals average total cost.
While monopolistically competitive firms are inefficient, it is usually the case that the costs of regulating prices for every product that is sold in monopolistic competition by far exceed the benefits; the government would have to regulate all firms that sold heterogeneous products – an impossible proposition in a market economy. Another concern of critics of monopolistic competition is that it fosters advertising and the creation of brand names. Critics argue that advertising induces customers into spending more on products because of the name associated with them rather than because of rational factors.
Lastly, oligopoly is another market structure. There are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly; an oligopoly has high barriers to entry. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces. Reference Investopedia. com (2006) Economics Basics: Monopolies, Oligopolies and Perfect Competition retrieved from: http://www. investopedia. com/university/economics/economics6. asp