IntroductionAccording to Tucker (2010), market structure refers to the extent in which competition prevails in a given market. The level of competition is mainly determined by the number of buyers and sellers, and by the nature of the products. Additionally, competition is determined by the degree in which information flows in a given market. The structure of a market affects the pricing decisions of firms as well as their profits. The aim of this paper is to describe various market structures and to provide a real-life example of each market. Perfect CompetitionPerfect competition is a market whereby there are many sellers offering identical products (Lipsey & Chrystal, 2011).
Under this market, the prices of products are determined by the forces of demand and supply. Firms operating in this market are assumed to have perfect knowledge of the prevailing prices. Examples of perfectly competitive markets include the unskilled labor market and the agricultural market for eggs. Tucker (2010) notes that in the long run firms operating in a perfectly competitive market can leave the industry if they earn below normal profits and new firms can enter the market if the existing firms earn abnormal profits.
Thus, high entry barriers in this market will prevent entry of new firms hence the existing firms will be able to earn supernormal profits in the long run. In a Perfect competition, firms are cost efficient because they produce at a point where price is equal to marginal cost (McEachern, 2010). However, high entry barriers cannot influence cost efficiency because firms only produce at a level where the total average cost is at a minimum. The price of a product in a perfectly competitive market is determined by the forces of demand and supply and not by the firms (Tucker, 2010).
Accordingly, inefficient firms may not survive in this market structure even with high entry barriers because they might earn below normal profits. Furthermore, in a perfect competition all firms sell homogenous products. However, the fact that firms are price takers means that entrepreneurs may not be motivated to produce substitute productsIn a perfectly competitive market, output is standardized hence buyers do not distinguish products manufactured by individual firms (Ernest & Liberman, 2007).
This makes firms to face a demand curve that is perfectly elastic. Additionally, firms are price takers and thus a change in price by one firm does not affect other firms. Entry of government does not affect the pricing ability of a perfectly competitive market because prices are determined by the forces of demand and supply. However, international trade may affect this market structure because it can increase the level of competition and drive down prices. Monopolistic CompetitionAccording to Tucker (2010), a monopolistic market structure is a market that has a large number of small sellers who offer differentiated products.
In this market there are low barriers to entry hence short-term profits attract new entrants in the long run. Thus, high entry barriers can prevent new entrants and this means that existing firms can enjoy high profits in the long-run. Under monopolistic competition firms have partial control over the price of their products (McEachern, 2012). However, a firm must be efficient in this market structure because when it raises its prices above the average market prices it may lose its customers.
Therefore, firms are cost efficient in this industry even with the existence of high entry barriers. Consequently, inefficient firms may not survive in this industry because of the high competition. An example of monopolistic competition is the T. V sets industry which is characterized by many firms which manufacture similar but differentiated products.