Market Structure
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Forms of Industrial Organization, Market Structure, and Pricing
University
MBA 501
Abstract
The team will identify the four market structures, Pure Monopoly, Oligopoly, Monopolist Competition and Pure Competition in the forms of industrial organization.
Pure Monopoly is one firm or company that controls the whole market whether there may not or may be substitutes. Oligopoly is a market dominated by a few large producers of a “homogeneous” or differentiated product. Monopolistic Competition consists of large number of sellers, with differentiated products making it easy to enter to and exit from the industry. Pure Competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. According to the standard economical definition of efficiency, Pareto Efficiency perfect competition would lead to a completely efficient outcome. This analysis of a perfect competitive market provides the foundation to the theory of supply and demand. Four companies will be discussed in which there are perfect examples of each type of market structure. Discussion about these companies will include the type of market structures and their pricing and non-pricing strategies.
Pure Monopoly
Carnegie Steel Company is an example of Pure Monopoly where a group, a company or a firm can partially plan and control the market through strategic product updated or lower prices. Potential competition can be thwarted while demand for the dominant companys output can be preferentially developed. A good example of this type of market structure would be oil companies. Andrew Carnegie constructed a profitable steel mill at Braddock, Pennsylvania in the mid 1870s. Mr. Carnegie purchased other nearby steel mills due to sufficient profits in the beginning of existence. Due to the lack of substitutes and not many players in this particular market, pricing strategy is controlled by itself. Price discrimination is possible, but has to go by several regulations.
Trinity Industries a Monopoly Market Structure
“A monopoly is defined as a persistent market situation where there is only one producer of a product or service, in other words a firm that has no competitors in its industry” (Wikipedia). Trinity Industries (Trinity) is one of the nations leading diversified industrial companies, located in Dallas Texas that provides a variety of products and services for transportation, industrial, construction, and energy sectors. Trinity Industries has competitors, but they are far removed for causing any threat to Trinitys business. “Monopolies are characterized by a lack of economic competition for the goods or service that they provide and a lack of visible substitute goods” (Wikipedia).
The company in engaged in manufacturing and marketing railcars, inland barges, concrete and aggregates, highway products, beams and girders used in highway construction, weld pipe fittings, tank containers, and structural wind towers. In addition, the company also leases railcars to through a captive leasing business. Trinity generates revenues through five business divisions: rail group, construction products group, inland barge group, energy equipment group and railcar leasing and management services group” (MarketLine May 16, 2007).
In this monopoly the output will depend on price determination. Facts must be considered like cost to produce and manufacture the goods and services. “A monopolist seeking to maximize total profit will employ the same rationale as a profit seeking firm in a competitive industry. If producing is preferable up to the output at which marginal revenue equals marginal cost (MR=MC)” (McConnell and Brue Chapter 24). In this manner these corporation corner the market by making it difficult to compete. “The monopolist will operate in the elastic region of demand since in the inelastic region it can increase total revenue and reduce total cost by reducing output” (McConnell and Brue Chapter 24). In this monopolistic market, there are rent-seeking expenditures to consider, in business the company tries to turn a profit. This is not always the case when there are cost to run the business and shift in resources needed to maintain the business. “Faced with continuing losses, in the long run the firms owners will move their resources to alternative industries that offer better profit opportunities” (McConnell and Brue Chapter 24). “The businesses that comprise Trinitys Energy Equipment Group manufacture structural wind towers, containers for the storage and transportation of liquefied gases and other liquid products, and tank heads. Trinity Structural Towers, Inc. is a leading U.S. manufacturer of structural wind towers. Trinity Containers, LLC is a leading producer of tank containers, storage tanks, spherical tanks, and several types of cylinders. Trinity Containers, LLC, using the brand name TATSA®, is the larges liquefied petroleum gas container manufacturer in Mexico” (Trinity Industries 2001).
“The monopolist is engaged in price discrimination, the practice of selling a specific product at more than one price when the price differences are not justified by cost differences” (McConnell and Brue Chapter 24). Under these conditions, the monopolist can increase its profits by charging different prices to different buyers. Trinity must adhere to certain conditions in order to conduct the price. These conditions include monopoly power, market segregation, and no resale. A prime example of price discrimination occurs at the baseball park. “All three requirements are met for game tickets: 1) the team has monopoly power, 2) it can segregate ticket buyers, by age group, each age having a different elasticity of demand; 3) children cannot resell their discounted tickets to adults” (McConnell and Brue Chapter 24). Trinity has monopoly power by being the leader in this business and can segregate sales from contracts to local business, state and local government agencies. Natural monopolies traditionally have been subject to rate regulation or price regulations. Government agencies have stepped into the loop to break up monopolies, allowing new businesses to compete in the market with different corporations. “The railcar leasing and management services group provides comprehensive railcar fleet management services such as leasing and financing options, administration,