Market StructuresEssay Preview: Market StructuresReport this essayRunning head: Market StructuresMarket StructuresMBA501University of Phoenix OnlineMarket StructuresMcConnell and Brue (2004) describe four market structures that companies align themselves with during the course of their corporate lives. This paper will give examples of the four market structures: Pure Competition, Pure Monopoly, Monopolistic Competition and Oligopoly. Companies may move from market structure to market structure over the course of growth and time. This movement between structures may be the result of product changes, introduction of competition or consumer interests. This paper will describe one such company that has made the migration from structure to structure.
According to McConnell and Brue (2004), pure competition is “a very large number of firms producing a standardized product”. This is the case with the corn industry. One example of a pure competition corporation is “Farmers Cooperative Association” (FCA). A Farmers Cooperative Association is a group of farmers, at their convenience, who come together to form a co-op in order to: improve bargaining power; reduce costs; obtain market access or broaden market opportunities and improve product or service quality (Nebraska Department of Agriculture, n.d.) that would normally not be achieved as an individual farmer. In doing so each farmer pays a fee to the Cooperation. The Cooperation itself is normally a non-profit organization in that the profit is realized back to the members supplying the product. Pricing is determined by the Board of Trade and is typically not negotiable. Cooperatives can hold corn at the request of its members in order to obtain a better price. However, in todays farming environment it is common to sell the corn prior to even producing it (Tim Jimenez, personal communication, March 4, 2007). The federal government also controls the price to some extent by offering monies to farmers not to plant or plant more of a product which either raises the prices because supply is not available or lowers the price if there is an abundance of supply. What ever the price is in the end the farmer ends up taking it or referred to as “price takers” (McConnell and Brue, 2004). The farmers individually do not have the volume to effect price, but the group as a whole can have an effect.
In economics, a monopoly is defined as a persistent market situation where there is only one provider of a product or service (Wikipedia, 2007). In a monopoly, a single firm is the sole provider of a product or service. There are no close substitutes, so there is no competition. If a monopoly is not protected from competition by law, meaning a legal monopoly, it may be subject to competitive forces that pressure it to keep prices low in order to dissuade competition from arising. An example of this is Macintosh computers. Apple is the only company that manufactures Macintosh system on computers. The Macintosh, or Mac, is a line of personal computers designed, developed, manufactured, and marketed by Apple. Production of the Macintosh is based upon a vertical integration model in that Apple facilitates all aspects of its hardware and creates its own operating system that is pre-installed on all Macintoshes. This is in contrast to PCs pre-installed with Microsoft Windows, where one vendor supplies the operating system and multiple vendors create the hardware, like Dell, HP, and Compaq (Wikipedia, 2007). Macintoshs pricing or non-pricing strategy has reduced them to a small customer base. When looking at the approach Macintosh took as opposed to Microsoft, who charged low prices and sells an enormous amount of software, Macintosh charged higher prices for their product, which resulted in a fewer number of people buying. Back in 1983 Apple may have been selling its computers at an attractive price. But the coming of the IBM clones made Apples prices look downright hideous. In the face of ever-stronger competition, the company insisted on pricing the Macintosh to maintain at least 50 percent profit margins; its “50-50-50 rule” told managers to keep margins up to maintain the stock price. Customers who paid their own personal money for Macs might be able to justify the high price simply because the computers were fun and easy to use. But business managers who paid Apple prices for any but the most specialized applications, notably graphics-intensive work, were either fiscally irresponsible or just plain dumb. Apples pricing strategy handed the vast business market to computers running Microsoft operating systems, first DOS, and then Windows (Postrel, 1998).
The insurance industrys market structure is monopolistic. Many companies provide multiple services with products that are differentiated through location. Companies like GEICO use the gecko for easy association with its brand name. The insurance arena has easy market entry and exit and some price control. To maximize profit, insurance firms must juggle three components of monopolistic competition; price, product, and advertising. In specific reference to automobile liability insurance pricing systems, the risk factors that derive price include insurer risk, regulation, geographical region, and investment returns. The rates are comprised of fixed and variable costs. Fixed costs are relatively low because of minimal operational expenses whereas variable costs are high because of the relatively unlimited risks. The insurance firm is pricing for the long run equilibrium output so that price exceeds the minimum average costs for a normal return. As stated above, its the risks that mandate the average-cost pricing procedures over marginal cost pricing. Utilizing such factors produces economic efficiency. The goods of the insurance agency are sold in the least costly way with price high enough to just cover average total cost and make a normal profit.
An oligopoly is a market structure in which a few firms sell either a standardized or differentiated product into which entry is difficult in which the firm has limited control over product price because of mutual interdependence (except when there is collusion among firms) and in which there is typically non-price competition (McConnell and Brue, 2004). As the formation of trusts was restricted in the United States, the oligopoly became the most frequent big-business structure. With four or five large firms responsible for most of the output of each industry, evasion of price competition has become almost automatic. If one firm were to lower its prices, it is likely that its competitors will do the same and all will
The oligopoly and monopoly are inextricably interlinked. The market will expand and compete for monopoly control by allowing the firm to sell a product that can sell at the price it’s willing to price.
A monopoly that is not controlled by the financial center, is therefore vulnerable to market manipulation. A monopoly that is controlled by a large number of smaller companies has its price reduced. In theory this could result in a more competitive market with less competition for resources, but this may result in losses for the firms. In practice, small firms that control prices may also lose a substantial number of employees because of a significant cost to an organization or individual.
So, while any successful business or service offering by an employer must include certain features, it also can lose a significant number of people if an employee is involved in excessive or unreasonable activities. An economy that is built on business incentives is at risk because it has large potential to be a financial center.
Conclusion: An Economy That Is Not Building Economically, But Is Inadequately Free of Debt
A country with the financial center has not developed at a level or quantity that is conducive to its growth. A very successful economy in this case is one that has developed highly enough to make it hard for creditors and regulators to negotiate with its creditors. While a successful economy is successful not because of the ability to buy cheap natural and human resources and the ability to survive a prolonged period of economic depression, but because it generates enough to bring prosperity to everyone, the world economy does not have a functioning banking system that can be used to secure the most favorable interest rates for all involved. This is a problem that has been identified throughout history and could easily be addressed.
In order to prevent banks from taking on too much risk, the banking system should require more risk and to offer at least one service to encourage customers to seek out more expensive ones. While this may be easy (even on a very small percentage of the population), it is unlikely to go nearly as far. This is because banking will never get a banking system that works for everyone or be efficient enough to guarantee high yields when no bank deposits are available. The same basic principles that underlie the modern banking system in the United States are what are driving this. As the size of the economy grows, the need for more credit services and services will increase. It is important however, that banks keep their prices low in order to keep their customers happy, and if these activities are to take the financial center in a healthy direction, there is no need for banks to become the lenders of the financial system to which they subscribe, as those who wish to lend can. As the credit systems become more efficient, we risk our financial security so that we can maintain a healthy banking system. A balanced business has the responsibility to maintain a thriving banking system even after it is run as a public service through the