Defining the Term Market - Coursework Example

Managerial Economics What is market? Table of Contents Contents Contents 2 A. Introduction The success of business firms seems dependent on the number of customers purchasing their products. However, selling is not a simple task as it involves knowledge and awareness of the target market, the market structure and nature of competition, and strategies appropriate for a particular market structure. The following sections discusses the tradition definition of the term “market” and changes stimulated by business activities focusing on delivering specific customer needs, managing customer relationships, and competitive advantage. Section B discusses the various market structures such as perfect competition, monopoly, monopolistic competition, and oligopoly. The various aspects of perfect competition market structure are described in Section C including advantages of this particular structure over other structures mentioned in Section B and criticisms from various economic experts. In contrast, Section D covers various aspect of the opposite structure or imperfect competition including discussion on behaviours of economies under this market condition. Finally, the conclusion section presents a summary of this report B. Market definition A concept in social science and economics, the term “market” is commonly defined as gathering of people for purchase and sale of provisions or livestock but according , the term should not be viewed simply as a kind of social arrangement as it involves ideals and vision. It is a complex institution where parties voluntarily do exchanges or the action of transacting, buying, selling, and bargaining . A market therefore is the physical place specifically organised for exchange activities, a place to buy and sell, and driven by social and economic needs . However, these definitions according to shifted from mere purchase of goods at a fixed time and place to aggregation of potential customers as companies today considered every customer as their own market segment with specific needs that must be fulfilled. For instance, the marketing strategy of most business organisations nowadays is not limited to creating, communicating, and delivering value to customers but include managing customer relationships in a manner beneficial to the organisation and its stakeholders . According to , the significant change in strategy makes market the focus of organisational activities aiming to meet the specific need of a particular customer. In fact, the traditional definition of market is now considered broad as it lacks practical applicability in terms of product and geographical characteristics . In summary, the most relevant definition of market is one that incorporates not only social arrangement, exchanges, places, specific customers, product, and geographical characteristics, the visible and invisible interactions of supply and demand. However, although market is often associated with place or location where people meet to buy and sell goods, it can exist with or without spatial connotations. As discussed below, a market is not simply a place of interaction between buyers and sellers but structured in a manner consistent with the behaviour of market players, product differences, the number of market participants, and the possibility of new firms entering a particular market. The traditional definition of the term market seems broad and mainly focusing on the most visible aspect of the market and ignoring the role of competition in changing perception of people about market. C. Market structure Since market involves interaction between group of economic agents and buyers, a market structure according to is a set of organisational features (extent product differentiation, number of buyers and sellers operating in the market and their relative size, and the extent to which new firms can enter the market) of the market that can significantly influence the extent of competition. In other words, it is about how industries are organised and determined by the way firms act, the type of product, ease of entry or exit, amount of market power, and the level of government intervention . There are four main types of market structure and these include perfect competition, monopoly, monopolistic competition, and oligopoly . Perfect competition refers to a market structure that is characterised by absence of rivalry or competition, product homogeneity, number of seller of a particular product is too small compared to the size of the market, perfect information about the price and quality of the product, and freedom of entry and exit . However, firms in this market structure have no market powers as they do not have control over the price and since raising prices, output restriction, and anticompetitive strategies are unlikely in perfectly competitive industries, the role of government in this market structure is small. By analysis, perfect competition seems problem free in relation to other market structure below particularly for new firms who wants to enter the market and benefit from less competition and perfect market information. However, as discussed in Section D, perfect competition market structure has its own limitations that should be considered by new firms interested in a particular market. In contrast, monopoly market structure is characterised by firms monopoly over the price or its capacity to maintain price over marginal cost, inefficiency in relation to perfect competition, higher prices, and restricted output for more profit. Monopoly often result to misallocation and unproductive use of resources, and significant loss to society . Monopoly and perfect competition are polar market structures as a single seller in this market structure, the firm can optimise trading to gain more profit. Monopoly can be seller (seller set the price) or buyer driven (buyer proposes the price) . Monopoly can be pure or natural and in pure monopoly, the market is exclusively controlled by a single producer whose market position is often protected by barriers to entry . In contrast, natural monopoly occurs when the firm has the ability to provide goods and services and services at lower cost thus has the power to dominate the market . In monopolistic competition, the market structure is characterised by many small sellers, differential product, and easy market entry and exit. However, product differentiation is the main feature of this market structure as it creates real differences between goods and services. For instance, products marketed by firms are somewhat similar but consumers view them as distinctive in terms of quality and effectiveness . In terms of free entry, this market structure allows closely related goods to be sold in the market . Therefore, quality and effective product gives a firm monopoly over the sale of that particular brand while new firms with closely related goods can compete freely. As opposed to small sellers and product differentiation, oligopoly market structure is characterised by few large firms controlling at least 40% of the industry. A “differentiated” oligopoly, similar to product differentiation in monopolistic competition structure, allows selling of similar but not identical products. In the United States for instance, carmakers such as GM, Ford, and Chrysler dominate domestic production of different car makes and models but they oligopoly in the sense that they produce cars with different features. A pure oligopoly on the other hand occurs when firms produce homogenous products. For instance, steel companies such as Bethlehem Steel, LTV, and others produce steel while Reynolds, Alcoa, and Alumax are known for their aluminium products thus has the capacity to impose interdependent pricing, increase brand loyalties, and discourage entry due to high costs of real capital, research, and advertising . In summary, market structure is organisational features of the market that significantly influence the way products are made and sold and the nature of competition in a particular market. The key differences between perfect competition, monopoly, monopolistic competition, and oligopoly are the competition between products, the freedom to enter and exit the market, and the capacity to control the price of products and services. For instance, there is almost no competition in both perfect competition and monopoly market structure in relation to monopolistic competition and oligopoly where a number of firms with similar but not identical products compete. However, except for perfect and monopolistic competition, the remaining market structure seems to discourage entry of new firms due to barriers created associated with market share, quality, cost, and brand loyalty. D. Perfect competition As discussed earlier, perfect competition is one of the four main types of market structure. Perfect competition is marked by competitive market involving large number of buyers and sellers . According to , selling of homogenous products is widespread in perfectly competitive market while new firms can enter this market structure conveniently. However, it is important to note that competitiveness of a firm in the perfect competition market structure is not guaranteed as market structure merely suggests the nature of the existing market system. For instance, although perfect competition market structure is characterised by large number of buyers and sellers, production and selling of homogenous products, freedom of entry and exit, and complete information concerning the condition in the market, the price of a particular product is controlled by market demand and supply . Therefore, a new firm must be able to offer same price for similar product otherwise, its chances to compete will be small. Critics of perfect competition theory explain that although such idea is extremely useful, it does represent real-world business scenarios. This is because according to , the actual markets deviate from perfect competition and monopoly in both structure and behaviour of the firms. For instance, the actual market structure today is marked by imperfect competition which in essence fall somewhere between perfect competition and pure monopoly. However, as opposed to “price taker” characteristic of firms in perfect competition, firms in this market structure has some control over the price of the products or services . Since critics view perfect competition as not a very realistic market structure, the limitations identified are mostly directed on unrealistic assumption of the market in the real world. For instance, aspects perfect competition are rarely met in the real world, firms cannot grow as they cannot take advantage of the economies scale, consumers who prefer product variety are disadvantage by firms producing identical or undifferentiated products. Moreover, the inability of firms to engage in R & D as lack of economic profits will likely prevent firms from funding research and development, and real world situations preventing efficient allocation of resources due to market failures . E. Imperfect competition As opposed to assumptions in perfect competition market structure, imperfect competition offers a degree of market power such as setting own prices, reduced uncertainty over prices, and better investment decisions . According to , firms can impose higher profit margins and likely to generate higher investment, lower savings, and higher level of aggregate demand. Imperfect market structure has positive impact on price and output decisions such as the advantage determining how prices is created in the market and how they are affected by external and internal real world circumstances. Firms in imperfectly competitive marker predicts the location and shape of its demand curve as opposed to decisions based on expectations about product and market price commonly found in perfectly competitive environment . However, the success of imperfectly competitive market is highly dependent on the effectiveness of interdependent firms. For instance, imperfect competitive market structures with few suppliers will likely experience problems associated with switching sources of supply, which is often complex and costly. Firms will operate at less than full capacity, which in essence is a significant competitive disadvantage while supply and demand becomes inelastic regardless of changing prices . Moreover, substitution, good quality, consumer income, and can affect prices in imperfect competition others thus reduction in supply result in reduction of demand . According to , the difference between the older theory of monopoly and the current monopolistic or imperfect competition theories is the fact that the latter has identifiable criteria such as the perfectly elastic demand curve for pure competition. Pure competition is the chief characteristic of imperfect competition where the demand curve for each firm participating in the economy is perfectly elastic or a situation where supply and demand for a particular product is affected by price change and vice-versa. In imperfect competition, this situation prevent firm from influencing the price of its product as the market itself determine the price. Therefore, this ruling price prevails regardless of the amount produced by firms. This is the reason why firms operating in imperfect competition is characterised by small production and underutilized resources, workers receiving wages less than the value of what they produced, and widespread price discrimination . The variations in imperfect competition structure commonly occur with respect to the nature of the products, the objective and strategy of the firms, that can be either based on price or quantity, and the possibility of entering the market. Similarly, goods produced in imperfectly competitive market can be homogeneous or differentiated while firms’ objectives may be individual profit maximisation . In study of imperfect competition models, selected economies demonstrate some of complementary mechanism. For instance, if a certain firm in the economy are producing more output, the tendency is to spend more and increase demand for the product. Similarly, the growing demand for a particular product tends to encourage producer to increase output. In the economy with multiple firms, the interaction is somewhat strategic across sellers of identical products. For instance, if one seller produce more, the other will produce less due to the residual demand curve. Moreover, income in this economy significantly affects the level of activity of producers while the link between sectors is created and maintained by the relationship between current income and expenditures. In summary, imperfect competition is more realistic in relation to perfect competition as activities of the firms and other market players are highly dependent on real world circumstances. However, since imperfect competition allows imbalances to occur naturally, firms must be prepared to face sudden changes and be able to cope with the law of supply and demand. F. Conclusion The meaning of term “market” is far more complex than social arrangement, selling and purchasing goods, and a place to shop, as it can exist anywhere and involves dealing with product and geographical characteristics, specific customer needs and relationship, and activities beneficial to the organisation and its stakeholders. More importantly, a market is structured in a manner consistent with the behaviour of market players, extent of product differentiation, number of buyers and sellers, and other important features. It has four main types – perfect competition characterised by absence of competition and easy entry and exit, monopoly characterised by single produced controlling the market and protected by entry barriers, monopolistic competition consisting of small sellers and differentiated products, and oligopoly, a market structure marked by few large firms controlling large portion of the industry. Perfect competition is the opposite of imperfect competition as it view the market as an ideal system without limitations. In contrast, imperfect competition recognised uncertainties and the impact of internal and external real world circumstances; firms make decision based on facts, and operate in conditions where the effects of supply and demand are expected. G. References/Bibliography Aldridge, A. 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