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Requirement
Question 1
Identify a firm for each of these market structures and explain why each firm belongs in themarket structure identified.
Answer:
Coca Cola is a huge firm that represents Oligopoly market structure as there are only few sellers of cola in the market such as PepsiCo. It, therefore, has a leverage to influence prices and distort the competition. Although both of these companies sell similar products (colas), but they are slightly different as well – in terms of features and their mass appeal. These companies have largely been unfazed by the competition because of very limited competitors in the market (Mazzeo, 2002). Also, as per the definition of Oligopoly by the economists, Coca Cola features among those firms that produce 70 to 80 percent of total cola output.
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Con Edison is giant monopoly that provides electricity, water and gas to the people of United States. Over the years, Con Edison is the only provider of above services. Being a monopoly, it has relatively large and expensive power stations – effectively blocking the entry of other players into the market, which is why, it has limited or no competitors at all. It also allows Con Edison to make no variation in product or services and has a complete control over the market. It acts to maximize its profits because of the price discriminations (Thompson, Scherer & Shepherd, 1971).
Mc. Donald’s represents Perfect Competition market structure because it belongs to the market where different sellers (e.g. Burger King) and buyers participate. All of these entities offer similar products. Mc. Donald’s, however, advertise its products differently to increase its revenues. Other firms with identical products can also enter and exit the market freely. As there are too many players participating in the market, Mc. Donald’s has limited or no control over the prices. They are only determined by demand and supply (Cukrowski & Aksen, 2003). Also, it has no major variations in its products than its competitors whatsoever. As a matter of fact, if Mc. Donald’s decides to increase the prices of burger, consumers will waste no time to turn to its nearest competitors.
Car companies like Ford Motors are a perfect example of Monopolistic Competition market structure. Ford Motors and all other companies in the car segment have similar products (cars) but they also make different types cars (Coupe, Convertible, SUVs, and MUVs) altogether. It has an independent and limited share in the market, which is why, has limited control over the prices. The product differentiation is based on the brand, size, color and shape etc. so that the buyers will make their conscious independent choices to buy them (Feenstra, 2010). As a result of this, Ford Motors has a little bit of leverage to influence market prices of its car models. In this car segment, other car firms are also free to enter or exit from the industry.
Question 2
How is marginal analysis used in the price and output decisions of firms in the various market structures?
Answer:
Marginal analysis refers as to how an optimal behavior is determined by comparing cost margin and benefits resulting from small variations. The decisions taken in a firm regarding prices include analyzing marginal contributions to revenues and costs. Any firm achieves profit maximization if its marginal revenue becomes equal to marginal cost. The firm then charges a price which is determined by the demand curve. Marginal analysis is one of the most crucial methods with which managerial decisions are taken regarding prices and output. There are two main components that are crucial in marginal analysis - marginal revenue and marginal cost. Marginal revenue is the profit associated in expanding output by one unit. Therefore, we have -
Total Revenue = Price * Quantity.
Marginal cost is an increment in the cost with a unit increase in the output. That is, a variation in total cost due to change in output. Market prices being dictated by demand and supply suggest that marginal cost equal to marginal revenue. For analyzing pricing decision, if marginal revenue exceeds marginal cost than marginal profit is positive therefore greater quantity could be produced and vice-versa (Bhat & Rau, 2008).
Summary
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Monopoly dominates the market in a way that other firms find it difficult to enter
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Perfection competition allows same prices in the market
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Oligopoly allows lesser firms to dominate market with control over prices
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Monopolistic competition allows companies to sell similar but not identical products.
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Marginal analysis allows companies to produce profit maximizing amount by equating marginal revenue and marginal cost.
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Bhat, M., & Rau, A. (2008). Managerial economics and financial analysis. Hyderabad: BS Publications.
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Cooper, L., & Inoue, A. (1996). Building Market Structures from Consumer Preferences. Journal Of Marketing Research, 33(3), 293. http://dx.doi.org/10.2307/3152126
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Cukrowski, J., & Aksen, E. (2003). Perfect competition and intra-industry trade. Economics Letters,78(1), 101-108. http://dx.doi.org/10.1016/s0165-1765(02)00170-2
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Feenstra, R. (2010). Measuring the gains from trade under monopolistic competition. Canadian Journal Of Economics/Revue Canadienne D'économique, 43(1), 1-28. http://dx.doi.org/10.1111/j.1540-5982.2009.01577.x
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Mazzeo, M. (2002). Product Choice and Oligopoly Market Structure. The RAND Journal Of Economics, 33(2), 221. http://dx.doi.org/10.2307/3087431
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Thompson, A., Scherer, F., & Shepherd, W. (1971). Industrial Market Structure and Economic Performance. Southern Economic Journal, 38(2), 269. http://dx.doi.org/10.2307/1056840
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