This research paper aims to give an overview the four types of market structures: perfect competition, monopolistic competition, oligopoly, and pure monopoly. The author will first define and give an example of each market structure. The paper will go into detail about the characteristics of each, and how it fits in today’s economic climate. Next the research paper will evaluate each market structure’s pricing strategy. Finally the research paper will conclude with a case study on Wal-Mart’s market structure and how it fits into the monopolistic competition model.
Market structures are a part of our everyday lives and affect everything around it from the food we eat to the health care services we receive. Market structures are “specific social organization that exists between buyers and sellers in a given market i.e. market structures are models of markets that describe a specific social organization[s] between buyers and sellers,” (Scribd Inc, 2011). These markets are fluid and dynamic structures, and as such they are always changing. What defines market structures are the number of buyers, suppliers, and firms. Additionally other characteristics of market structures are firms’ strengths, levels of competition, degree of product or service differentiation, and access to entry and exit from the market. Firms examine the overall market structure with the goal of defining and predicting consumer and competitor behavior. More importantly firms try to create and develop competitive strategies as part of an overall marketing plan based on the characteristics of the market. Market structures are divided into four categories: perfect competition, monopolistic competition, oligopoly, and pure monopoly. Due to the ever-changing nature of these structures, what the market looks like today, and what it looks like tomorrow, may be completely different. Lastly firms analyze these markets to determine which structure best fits their business plan, products, and pricing strategy.
A perfect competition market, also known as pure competition, is one that theoretical in nature. It is generally used as a comparison model for other market structures. There are many debates over whether any industry would fall into a perfect competition market. Under this market structure, a firm exhibits a horizontal demand curve and all firms sell identical products, and are perfect substitutes for each other. Additionally, advertisement costs are extremely low and in most cases zero since there are not any differentiation competitive advantage. Another attribute of the market structure is having many sellers where no individual seller is in the position to change the price by controlling the supply. Thus all firms have a relatively small market share. This market structure also has a low barrier of entry and exit. Since competition is not aggressive, firms can enter at any time without having worry about being attacked by competitors. Since the barrier to exit is also low, firms can leave the market and not suffer great losses by being able to sell their business and assets at great ease. This can be contributed to all the products being identical and easily transferred among businesses. More importantly these low barriers to entry and exit ensure normal level of profits across the market. Next, the market is characterized as having many buyers. Individual buyers, similar to individual sellers, cannot control the prices by changing the demand since their demand independently is very small. An important feature of the market is there is limited and in many cases no government intervention. Since the market is not controlled by buyers or sellers but rather supply and demand “there is no government intervention in the form of taxes, subsidies, licensing policy, control over the supply of raw materials, and etc.,” (Gaurav, 2010). An industry that comes