Maximizing_Profits_in_Market_Structures

Maximizing Profits in Market Structures Gregory Missman XECO/212 December 4, 2011 Joyce Williams Maximizing Profits in Market Structures There are three main types of market structures: competitive markets, monopolies, and oligopolies. In each type, prices and supplies are determined differently. The economy is affected differently by each market structure. In the following paragraphs, the characteristics of each type will be explained and the rules for maximizing profits and supplies will also be laid out. It is important in business to understand the different types of market structures and how each conducts business. The most common type of market structure is a competitive market. In a competitive market there are many buyers as well as many sellers. The goods that are sold in these markets are essentially the same such as the market for cheese. There are many companies that sell cheese and also many consumers that buy cheese. There are so many companies that sell cheese that no individual company in this market can set the price of cheese. They must therefore set their prices based on the market price of cheese. This means that these firms are price-takers and must take the price that the market sets. This market price is based on the equilibrium price calculated by the supply and demand of the product. A company in a competitive market can only maximize their profits by determining the maximum amount of a product that they can supply the market. If they supply too much or too little of a product, they can lose profits. Entry and exit in these markets is free but the more firms in the market the more spread out the market becomes. A market with too many firms means that each firm can only cover a small portion of the demand for the product. If more firms enter that portion becomes smaller. When firms exit the market that portion becomes greater. If too many firms were to exit a certain market, the market could become an oligopoly. Competitive market structures are a big part of any countries economy. Without them the economy would fail and be in turmoil. This is because all that would be left are market structures where the demand is not as big of an issue and firms would be in control of what products were on the market and what prices were. Competition between many firms keeps prices down for consumers and gives the consumer more control over what is sold in the various markets. Oligopolies are where there are a few sellers and many buyers such as with car companies. There are only a few major car companies in the world and there are many buyers. Of course there seems to be dozens of car companies but when you look at who owns each brand of car, a lot of them lead back to the same company such as with Jeep and Chrysler. There is some debate among economists as to how many companies make up an oligopoly and who is to say just how many a few is. If two companies are the only ones to sell the same product they would have a major role in determining the price of that product but not as much as they would if they were the only company selling said product. The consumer could still switch companies if the one tried to charge too much. The same is true for three or four companies in an oligopoly. Maximizing profits can be done in this market structure by companies acting in collusion. This means that they come to an agreement with each other as to the price to charge for a product. In essence this makes them a team which is acting like a monopoly and deciding the market price of a product. They cannot charge too much because the consumer may decide not to buy any of what is being sold or they may decide to find an alternate way to get the product. If there were only two companies selling music and they both agreed to raise the price of a CD to $50, many people would consider pirating CDs to take away the power from these two companies. In an oligopoly or a monopoly, price is still determined by what a consumer will pay for a product. Demand still makes a difference. Entry into a market like this is limited because the more companies that enters, the less likely that this will stay an oligopoly. If too many companies exit the market, it could become a monopoly. An oligopoly has more power than a competitive market as to what prices are in their individual market but not as much as a monopoly. They are a big part of an economy because they offer products that you cannot get just anywhere. The main reason that oligopolies exist is because they deal in rare products that not all companies have the technology to create or have the money to create. A monopoly is a market structure where there is essentially one seller and many buyers. Monopolies are illegal in America but they do still exist to a certain extent. Microsoft has a monopoly on their Windows operating system. They are not technically a monopoly since there are other operating systems to choose from but Windows is the system that most people have in their personal computers because that is the system that comes with it. This means that Microsoft can charge whatever it wants for the program to an extent. There are still some limitations to what they can charge but it is much more than the opportunity cost of creating another copy of the program. Prices in a monopoly are limited by how much the consumer will pay for the product before they start to look for alternatives to buying from the company. Sometimes those alternatives are comparative products and other times they are illegal copies of the product. Maximizing profits in a monopoly is done by determining how much consumers will ultimately pay for the product. It does not matter how little the company spends on creating the product, if the consumer will spend 1,000 times that, then that is what they can charge. Supply is determined by how the demand for the product. If a company decides not to supply enough for the demand of the product, they may be able to charge more for what would be considered a rare product such as when Disney only comes out with a limited supply of a certain movie and makes that movie a collector’s item. Monopolies in an economy create higher prices but they also supply rare goods such as high quality operating systems for your computer. Entry into a monopolized market is essentially prohibited because once another company enters this market, it becomes an oligopoly and ceases to be a monopoly. Exit from this type of market simply takes away the market entirely since this is the only company supplying this product. Each of these market structures have their place in our economy and supply all of the goods that we as consumers demand. In competitive markets, you find common goods such as milk and clothing. In oligopolies, you find slightly rarer products such as tennis balls and automobiles. In monopolies, you find the most rare and sometimes the most demanded products such as computer software or your favorite rare movie. Each has its own place and each competes essentially for your money. If they are one of many companies supplying a certain product or the only company supplying a product, they still must depend on the consumer’s demand for any certain product. If you are willing to pay the price, companies are willing to supply what is demanded by the consumer. Reference Mankiw, N. G. (2007). Principles of Economics (4th ed.). Mason, OH: South-Western Cengage Learning.