Market_Structures

Differentiating Between Market Structures Abstract Four basic market structures function world-wide to fuel the global economy. This paper reviews the four basic market structures and the effect these structures have in the economy. Additionally, this paper covers real-life companies that operate under one of the four market structures. The goal of this document is to help the reader understand how each market structure works to encourage the success of the economy. Differentiating Between Market Structures Prices in the economy are set by competing forces of supply and demand. When there are numerous, equally matched competitors in an industry, prices are kept low as they can go without eliminating profits. When a business gains complete control over its industry, it loses the incentive to keep prices at levels that promote efficiency (Gale, 2008). Economists study differentlevels of competition throughout different market structures. This paper will differentiate between perfect competition, monopoly, monopolistic competition, and oligopoly. Using examples of firms listed in Table 1, the authors will explore goods and services provided, barriers to entry, price elasticity of demand, and economic profits of each structure. Other economic factors vary between each different market structure. This paper will compare and contrast different types of goods and the markets they belong to; also how supply and demand affects labor equilibrium from one structure to the next. The authors will evaluate the effectiveness of Verizon Wireless as a monopolistic competition. The author will also identify factors that affect labor supply and demand for Verizon Wireless. Types of Markets The perfect competition market structure is competitive to the point that any individual buyer and seller have negligible effect on the market price; for example: Dole Food Company in the produce market. Many competitors in the produce market offer the same product as Dole Food Company. Because no barriers exist, other firms enter the market and competitively lower prices; such is the reason firms earned minimum profit in perfect competitions (Essential Economics, 2004). Monopolies, on the other hand, are free from the danger of losing customers to competing companies. Barriers, such as patents and contracts, allow monopolies to be the sole provider of a particular product (Gale, 2008). For example, Amtrak owns the nation-wide railway system, giving them a monopoly passenger rail travel. Constructing another nation-wide rail system would be too costly; so the government funds and regulates Amtrak to guarantee safe, modern, affordable rail transportation. The last two types of market structures are: monopolistic competition, and oligopoly. These types are known as imperfect competitions, and fall somewhere between monopolies and perfect competitions. The monopolistic competition is a market structure in which many firms selling products similar but not identical. Wireless phone service providers all provide cellular service; however, each company provides a slightly different product that allows them to monopolize that area of the market. For example, AT&T has exclusive rights to the Apple I-phone, so wireless customers seeking an Apple I-phone must use AT&T. In the short term, these firms profit much like a monopoly; however, if too many competitors enter the market prices and profit lower in the long term. Below, Table 1 shows the four types of market structures. |Table 1 |Perfect Competition |Monopoly |Monopolistic Competition |Oligopoly | |Name of organization |Dole Food Company |Amtrak |Cell Phone Companies such as|Tyco Telecommunications | | | | |Verizon and AT&T | | |Goods or services |Crop production in |Long distance railroad |Services-Cellular service |Sub-Sea Fiber Optic Systems. | |produced by the |bananas, pineapples, |travel |such as phone calls, | | |organization |grapes, strawberries, | |texting, e-mail, music and | | | |etc. as well as salads | |more | | | |and vegetables. | | | | |Barriers to entry |None. Freedom barriers |Government regulation & |Somewhat free entry. Some |Huge initial capital investments | | |to entry in perfect |the cost of building |cost with advertising for |in cable ships, equipment, and | | |competition. |nation-wide railroad |name recognition. |manufacturing. | | | |system. | | | |Number of organizations |Several organizations in |Amtrak is the only |More than 180 wireless |Four – Tyco Telecommunications, | | |the agricultural crop |nation-wide passenger |providers in the U.S. Five |Alcatel-Lucent, KCS, Global | | |production business. |rail service with stops |largest are: Verizon, AT&T,|Marine | | | |in 48 states. Amtrak is |Sprint/Nextel, | | | | |regulated and funded by |T-Mobile, and TracFone | | | | |the government. | | | |Price elasticity of |The price is perfectly |The price is somewhat |Somewhat inelastic. People |Inelastic. Standardized systems | |demand |elastic with the demand |elastic considering there|are willing to pay for |are identical products are | | |curve as there are other |are other methods of |mobile talk, texting and |offered. There are no | | |companies to go to for |travel; however, some |internet. There are no |substitutes for a cable system, | | |produce or retail stores |people have aversions to |available substitutes for |wireless systems are not fast or | | |to purchase. |these other methods of |these services except from |reliable enough. These systems | | | |travel. There is a |one wireless company to the |are global necessities. | | | |demand for rail travel. |next. | | |Economic profits: Is |No |No |Yes |Yes | |there a presence of |2009 Net Profit Margin |2008 & 2009 showed a net |2009 Net Profit Margin was |2009 Net Profit Margin was 18.9% | |economic profit' (Yes or|was 5.4%. Historically |loss. Amtrak receives |28.2% (Verizon |(Tyco Electronics, 2010) | |No) |Dole does not report high|government funding to |Communications, 2010). | | | |excess profits. (Dole |continue operations. | | | | |Food Company, 2010) |(Amtrak, 2010) | | | Oligopoly The Oligopoly exists when few firms dominate an industry. Tyco Telecommunications is one of four companies in the world that provides sub-marine cable systems. Even if these firms do not collude with one another the individual decisions of one firm affect the others much more than in an industry with more competitors (Gale, 2008); if Tyco raises prices, the other three companies are likely to follow suit. The control on prices and bars on entry allow these companies to function together like a monopoly. Natural Monopoly Private, natural monopolies, common resources, and public goods are the four types of goods. Each type of good has two defining characteristics to determine which area the good is. The first question is to pose if the good is excludable; barriers can prevent people from using the good (Mankiw, 2007). The second question to ask is will the person's use limit that of another person's capacity for the same good. Private goods answer yes to both questions in which public goods answer no. A natural monopoly is excludable but not rival in consumption in which common resources are not excludable and rival in consumption. For example, grapes produced from the Dole Food Company in the chart above operate in a perfect competition; this is a private good as it is excludable and also rival in consumption as it prevents another person from using the same good. Examples of natural monopolies: Amtrak, Verizon, and Tyco Telecommunications. For public goods and common resources not excludable, this makes the goods free to use for all; according to Mankiw (2007): "For both of these types of goods, externalities arise because something of value has no price attached to it" (p. 225). Externalities can be either positive or negative, if it benefits others it is positive but if the good lessens the chance of other's use it is a negative externality. Comparing the four market structures with the four types of goods, common resources and public goods remain unlisted as the market structures offer goods or products. Market Equilibrium No matter what market structure a company falls into, all sell goods and services, thus becoming buyers in the labor market. Firms need workers to make, design, sell, advertise, and distribute products among other tasks (Sparknotes, n.d.). Labor supply is set by the amount of workers available in a market. . Labor demand is set by firms determining how much labor they need. A firm reaches the labor market equilibrium when the wage and quantity of labor have adjusted to balance supply and demand of labor (Mankiw, 2007). When there is an increase in labor supply but not demand, companies will hire more workers, but wages will fall. When there is an increase in labor demand and not supply, companies are willing to pay more and increase wages. By examining Verizon Wireless’ success as a monopolistic competition, one can see the influence they have in labor supply and demand in the telecommunications industry. Monopolistic Competition Verizon is successful as a monopolistic competition because it has the largest coverage area of all the other firms. Many consumers take this into consideration when choosing a cell phone service provider and Verizon’s coverage area makes this company the most reliable. In 2009, Verizon’s net profits were $17.5 billion (Verizon Communications, 2010) showing the firm’s economic profit. New organizations that enter the market often do not have the resources to put up new networks. Resolving the issue can be accomplished by renting bandwidth and tower space from successful firms such as Verizon. As the largest nationwide provider that grows exponentially every year, Verizon influences telecommunications labor market. Verizon’s size and growth are major factors of their demand for labor. Expanding coverage and upgrading from a “3G” to “4G” network all requires skilled workers. A major factor of Verizon’s labor supply is changes in opportunities in other markets. In order to attract a supply these workers Verizon must set a competitive wage. Telecommunications employees have similar skills as IT positions in other markets. If Verizon’s wages are too low, employees will seek IT positions in other markets, lower the supply of telecommunications workers. Subsequently, if Verizon’s wages are too high, employees in similar field will flood the telecommunications market causing a surplus in labor. The trick is to find a wage that in balance with quantity of labor needed. Conclusion The many factors in place in the economy all form to create a system that balances out to create a financial market in which buyers and sellers can have needs met in a fair fashion. Sometimes, firms exceed levels of control that consumers are comfortable with; likewise, firms lose control and become lost among a sea of competitors. Perfect competitions provide balance and even levels of competition for firms and consumers, whereas monopolies possess sole control over a good or service. Monopolistic competition and oligopoly are often seen in the United States economy among communications providers such as Verizon Communications, and AT&T. As a consumer, one would benefit greatly by understanding the system under which companies operate to better understand the marketplace. Reference Amtrak. (2010). Reports and Documents. Retrieved from http://www.amtrak.com/servlet/ContentServer/Page/1241245669222/1241256467960 Essential Economics (2004). Perfect competition. Essential Economics, 198-199. Retrieved from Business Source Complete database Dole Food Company. (2010). ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. p.47. Retrieved from http://phx.corporate-ir.net/External.File'item=UGFyZW50SUQ9MzYyMzIzfENoaWxkSUQ9MzU2MDAwfFR5cGU9MQ==&t=1 Gale (2008). Monopoly." Everyday Finance: Economics, Personal Money Management, and Entrepreneurship. Vol. 1. Detroit: Gale Virtual Reference Library. Web. March 20, 2010. http://go.galegroup.com/ps/i.do'&id=GALE%7CCX2830600059&v=2.1&u=&it=r&p=GVRL&sw=w Mankiw, N. G. (2007). Principles of economics (4th ed.). Mason, OH: Cengage Learning. SparkNotes Editors. (n.d.). SparkNote on Labor Demand. Retrieved March 15, 2010, from http://www.sparknotes.com/economics/micro/labormarkets/labordemand/ Tyco Electronics (2010). 2009 Annual report. p.32. Retrieved from http://phx.corporate-ir.net/External.File'item=UGFyZW50SUQ9MjY0NTd8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1  Verizon Communications. (2010). Investor Relations-Quarterly earnings. Retrieved from http://investor.verizon.com/news/20100126/