Four Different Market Structures

What are the four market structures and their characteristics? According to McConnell and Brue (2004) describe four market structures that companies align themselves with during the course of their corporate lives.: “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. McConnell and Brue (2004) also states that, 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 attained back to the members supplying the product. Pricing is determined by the Board of Trade and is typically nonnegotiable. Cooperatives can hold corn at the request of its members in order to obtain a better price. However, in today’s 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. Whatever 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, but when someone else is selling your goods that goes into brokering and then the dynamics of the structure changes.

In economics, a monopoly is defined as a ”persistent market situation where there is only one provider of a product or service” (McConnell and Brue, 2004). 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. Production of the Macintosh is contingent upon integration model in that “Apple facilitates all aspects of hardware and creates its own operating system that is pre-installed. 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).

Macintosh’s 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. But the coming of the IBM clones made Apple’s prices look repulsive. 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. Apple’s pricing strategy handed the vast business market to computers running Microsoft operating systems, first DOS, and then Windows” (Postrel, 1998).

The insurance industry’s 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.

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 suffer lower profits.

“The safest strategy is to never lower prices and raise prices only when there is abundant evidence that the other firms will also raise prices. An example of this would be the gas stations and even the oil suppliers, the prices change as a whole, you know that if one store in the are lowers their prices then so will others. Oil prices change by the barrel and it would be the same price across the board for whoever purchased it. When business conditions permit, the price leader will raise prices with the expectation that the others will follow” (Chapter 12: The Arthritic Hand of Oligopoly

Every business falls into a market structure, regardless of the size of the business, or the type of product it produces. Many companies transition through all of the structures as new products mature in development, and other products are researched, and later developed to an even newer product. As new products mature, more competition is introduced as resources become available. With the addition of technology and changes in feature designs, everyday there are doors that are opened for new corporations. Failing to understand one’s market structure could result in the misallocation of labor and financial resources, and cost the organization’s market share, profit, and even the life of the business. New products or services maintain the company’s customers and peak potential customers’ interests. Companies can be successful in each level of market structure as demonstrated, as long as the corporate decision-makers understand the characteristics of the different types of market structures, and how each might impact their bottom line.

References
McConnell, C. and Brue, S. (2004). Economics: principles, problems and policies, 16 ed. McGraw-Hill Companies Postrel, V. Creative insecurity: the complicated truth behind the rise of Microsoft. Reason Magazine, Charles, R. Pricing problems in automobile insurance: an economic analysis. Journal of Risk and Insurance Wikipedia. Monopoly.

Chapter 12: The Arthritic Hand of Oligopoly,http://www.eco.utexas.edu/graduate/Konstantinova/14_Oligopoly.htm