Market Structures on the Spectrum of Competition Free Essay Example

Oligopoly An oligopoly is a market structure which a few firms dominate. When a market is hared between a few firms, it Is said to be highly concentrated. Although only a few firms dominate, it is possible that many small firms may also operate in the market. Duopoly Its similar to the oligopoly but only two producers/sellers control the market. Monopoly A monopoly 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 impediments, 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 Price Leader When a firm that Is the leader In Its sector determines the price of goods or services.

Price leadership can be positive when the leader sets prices higher, since its competitors would be Justified in ratcheting their prices higher as well, without the threat of losing market share. In fact, higher prices may improve profitability for all firms.

Concentration ratio In economics, a ratio that Indicates the relative size of firms In relation to their industry as a whole. Low concentration ratio in an industry would indicate greater competition among the firms in that Industry than one with a ratio nearing 100%, which would be evident in an industry characterized by a true monopoly.

Predatory Pricing The act of setting prices low in an attempt to eliminate the competition. Predatory pricing Is illegal under anta-trust laws, as It makes markets more vulnerable to a 1 OFF competitors, such as create barriers to entry for new competitors or unethical production methods to minimize costs.

Oligopolies strategies Oligopolies may pursue the following pricing strategies: . Oligopolies may use predatory pricing to force rivals out of the market. This means keeping price artificially low, and often below the full cost of production. 2. They may also operate a limit-pricing strategy to deter entrants, which is also called entry forestalling price. 3. Oligopolies may collude with rivals and raise price together, but this may attract new entrants. 4.

Cost-plus pricing is a straightforward pricing method, where a firm sets a price by calculating average production costs and then adding a fixed mark-up to achieve a desired profit level. Cost-plus pricing is also ladle rule of thumb pricing. There are different versions of cost-pus pricing, including full cost pricing, where all costs – that is, fixed and variable costs – are calculated, plus a mark up for profits, and contribution pricing, where only variable costs are calculated with precision and the mark-up is a contribution to both fixed costs and profits.

Non-price competition is the favored strategy for oligopolies because price competition can lead to destructive price wars – examples include: 1 . Trying to improve quality and after sales servicing, such as offering extended guarantees. . Spending on advertising, sponsorship and product placement – also called hidden advertising – is very significant to many oligopolies. The Auk’s football Premiership has long been sponsored by firms in oligopolies, including Barclay Bank and Carling. 3.

Sales promotion, such as buy-one-get-one-free,is associated with the large supermarkets, which is a highly oligopolies market, dominated by three or four large chains. 4. Loyalty schemes, which are common in the supermarket sector. Collusion A non-competitive agreement between rivals that attempts to disrupt the market’s equilibrium. By collaborating with each other, rival firms look to alter the price of a good to their advantage. The parties may collectively choose to restrict the supply of a good, and/or agree to increase its price in order to maximize profits.

Exclusive contracts For example, contracts between specific suppliers and retailers can exclude other retailers from entering the market. – Vertical integration For example, if a brewer owns a chain of pubs then it is more difficult for new brewers to enter the market as there are fewer pubs to sell their beer to. Natural monopoly A type of monopoly that exists as a result of the high fixed or start-up costs of operating a business in a particular industry. Because it is economically sensible to have certain natural monopolies, governments often regulate those in operation, ensuring that consumers get a fair deal.