Learning about the different markets structures of the U.S. markets will play a major role in your success. It can help you understand how to make decisions and which type of business you should start, what type of business will be right for you and your needs, and what mistakes to avoid in order not to fail as a result of entering the wrong market.
In this article we’ll go over four different types: commodity, oligopoly, monopolistic competition and perfect competition. We’ll also discuss various techniques that can be used within these entities as well as why they’re important based on profit-maximizing behavior by firms within those economic structures.
We’ll go over how many firms will be found in each market structure as well as the types of firms that you’ll find. We’ll also discuss the different country markets each of these structures can be found as well as major differences you’ll find between them.
This is a very important topic within business and economics because if you know which type of platform to run your company on, your company will have a much higher chance of becoming successful. But first…let’s go over a few definitions so we know exactly what terms we’re using…
Commodity: a good or service without significant difference between brands, from the perspective of the end-user. Often the “lowest common denominator product.”
Oligopoly: a situation in which a market is dominated by a small number of firms whose market share amounts to roughly 50%.
Monopolistic competition: a type of competitive structure in which two or more sellers compete in the market, and each firm has only one customer (or customer group). Market supply and demand coincide and equal quantities are offered, but the firms cannot produce at prices that exceed marginal cost. Firms sell at prices that cover their average variable costs, where variable costs depend on output, but not necessarily total production.
Perfect competition: a type of market structure in which many firms sell an identical product. Each firm produces the same quantity of output at the same price because they are all producing homogeneous products. Firms compete by trying to sell their products for the highest price possible, but must also produce efficiently to avoid losing business to other firms. Because each firm is producing where marginal cost equals price, no individual firm can earn economic profits, although the market itself may be very profitable because it has excess demand.
Now that we’ve gone over what these terms mean, let’s discuss in more depth…
Commodity markets are composed of firms that produce something that has the same qualities. They are produced by industries that have to produce a lot of their products in mass quantities, so each product is the same. This also explains why commodity markets tend to have many firms in them. The main example of this would be how most fast-food restaurants are all the same type of restaurant.
Oligopolies feature a market with 2 or more sellers, but not necessarily more than 5. This means either 2 or more sellers, or possibly 1 seller and many different buyers (such as tech firms). The reason for this is that when there are only 2 firms producing in the market, and they become tied in negotiations or agreements, it becomes an oligopoly. This takes away what we know as a monopoly, where there’s only one firm producing in the market.
Monopolistic Competition is when you have a trading relationship between 2 buyers and multiple sellers. This type of trading relationship allows for differentiation in products or services that can lead to higher profits than if there were no product differentiation. Basically you have multiple buyers and sellers competing for customers with few barriers to entry which means a lot of competition within the industry. The example of this would be how Apples and Androids compete to provide consumers with wireless communication services through smartphones.
The example above shows an example of perfect competition. Because each firm produces the same product at the same price, they are all competing to sell their products to make more money. But because no one firm has any control over pricing, they can’t really control what they can charge for their products. What happens then is that the price ends up being moved down because there’s excess demand in the market.
This is where profitability comes in, where each firm is producing at the same level of output at the same price. Because firms are selling everything they produce, they are selling all of their output at P = MC. MC = MR, but because there’s no difference between firms P = MR. So, then you have that P = M(C), or that price is equal to marginal cost which means that market clearing prices are determined by marginal costs.
The major difference between perfect competition and commodity markets are pretty clear. They are both competitive structures but perfect competition means homogenous products which means each product has the same characteristics as every other product readily available for sale in said market.
Every market has its pros and cons. Not every market structure is profitable for all kinds of companies (though it is possible for any company to be profitable). So, the challenge becomes deciding which conditions are right for your business.
If your main goal is to be the only game in town, you might want to go with a monopoly or oligopoly structure because it can reduce supply and therefore increase demand for your products. But if you’re trying to find the highest price customers compete between for customers, then perfect competition could work best for you because there’s not much difference between products that are selling within that market.
In conclusion, the market structure you choose for your company will greatly affect your business’s profitability and long-term growth. It doesn’t make sense to attempt to go head-to-head with an entire industry, which is why it makes sense to analyze the different market structures you could make use of for your business.
If you’ve chosen a business model that’s working for your company, we’d love to hear from you! Let us know what type of structure your business uses and how you got your company started below in the comments, or reach out to us on social media!
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