In this essay, I will be focusing on market structures. It will be divided into two sections in section 1 I will be explaining and discussing the four market structures, namely Perfect competition, Monopolistic Competition, Oligopoly and lastly Monopoly.
Each of these market structures will be discussed in depth examples of these markets will be provided. As to how prices are set and how profits are determined. The markets demand curves will be illustrated in detailed based on their sales. I will also differentiate the difference between the four market structures.
In section 2 I will be debating ”real estate brokerage industry as a monopolistically competitive market structure”. In my debate, I will give my views and understanding on this statement. I will be reasoning my point of view and will provide practical examples to support my statement.
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Perfect competition is a market structure that consists of a large number of small firms. The product sold in this market are identical products. This market is like a sheep farmer. There are no barriers to entry in the perfect competition. If you have capital and you want to sell what John’s shop sells you can go ahead without anyone’s approval. Your prices must be clear and visible so that your consumers know to do good a comparisons shopping and be able to match prices well with your competitors. As a result, consumers will be reluctant to buy from a supplier who charges a price that is higher than a market price.
There are many suppliers in this market, therefore it is quite easy for new suppliers to enter this market structure and for others to exit the market structure without affecting the demand and supply curve. A supplier does not need a large amount of capital to start a business in this market structure.
In a perfect comparative market, all production factors are mobile, all sellers and buyers have complete knowledge of the market conditions. There is no government intervention to influence the decisions of buyers & sellers and all suppliers act independently.
Monopolistic competition is either dominated by a few large suppliers or by many small suppliers that sell different ranges of the same products. Many suppliers compete with each other in this market structure. The supplier’s products differ slightly but are close substitutes for each other.
A very good example I am going to use its running shoes, we get a wide range of running shoes with different names. They all deliver the same service but only differ when it comes to cost, customer satisfaction, taste, and quality.
Take for instance the NEW BALANCE running shoe has been used by more athletes over the years but when ASICS introduced its new GEL range and modernized its runners. NEW BALANCE lost more customers and it resulted in less profit for the firm. The action of ASICS had a negative effect on the market prices of NEW BALANCE.
Suppliers in this market compete by producing better products than their competitors. Product differentiation provides the suppliers to have control over price, in the monopoly market structure. Suppliers can charge different prices for their products to convince their customers. When more suppliers enter this market the current suppliers’ demand will decrease.
An oligopoly market exists of a small number of suppliers which dominate the market for a specific product for example in SA will be the cell phone network or coverage providers. These suppliers are independent, as the action of an individual supplier affects its competitor’s profit. That is why it is very important in this market to always be on the lookout for your competitor’s action and come up with a strategy that will sustain your firm.
If Vodacom raises the price of its data, MTN and CellC can consider this more as an opportunity to take some of Vodacom’s market share away from it by keeping the prices as they are. Oligopolist will follow a price cut but will not follow a price increase in a no collusive oligopoly market. It becomes very difficult for these companies to accurately predict what their competitors are planning to do next and this can lead to lower profits for them.
It is illegal for companies to engage in informal cooperative agreements to fix pricing of their services. There are legal procedures that can take to maximize profit one is price leadership, this happens when MTN set a price for calls per second and the rest of the other cell phone providers will follow. MTN becomes automatically the price leader. The other procedure for profit maximization is when companies enter into a formal agreement to restrict the output and raise prices it is called a cartel. This procedure also reduces the uncertainties amongst members as it serves as an entry barrier to new companies.
A monopoly refers to a market structure where one firm controls the entire market. The product it produces is homogenous. They have the market power in their hands since consumers don’t have other alternatives. Eskom is a good example of such a market; it provides the whole of South Africa with electricity. Eskom reduces output to increase prices and more profit. The government normally regulate its prices. There is no entry for other companies or it will be very difficult to enter such a market. The aim of monopoly is to maximize profit by the minimizing its cost.
The demand curve for shapes of this market is downwards sloping because a monopoly firm wants to maximize quantity. Therefore, a decrease in price level results in the curve slopping downwards.
Differentiation and Conclusion
Market structure How many firms Product type Market entry/exit Profits
Perfect competition Large number of small firms Completely homogenous goods Free entry and exit No impact on market price
Monopolistic competition Large number of small firms Differentiated products Free entry and exit All firms maximize profits
Oligopoly Small number of firms Homogenous or differentiated Barriers to enter and exit All firms Maximizes profits
Monopoly One firm High barriers to entry and exit Maximizes profit
”The property market in SA is often considered to be a monopolistically competitive market structure. More specifically, the real estate brokerage industry (Estate Agency industry) fits the model of monopolistically competition quite well.”
I fully agree with the above-mentioned statement that the real estate brokerage industry falls under the monopolistically competitive market. I would like to first give my understanding of real estate brokerage industry. I believe this industry is an industry where different properties are sold and rented out. Now, this industry perfectly fits the monopoly market structure, since there is a large number of firms in the industry like Pam Golding, SEEFF, Rawson to name a few.
‘A large number of firms’ is one of monopolistically competitive markets features which best describes the real estate market. These companies or firms compete against each other for the number of sales made in a monthly, quarterly or even yearly or in which location. Properties are also known as a shelter since it provides shelter for people residing in it. In this sense I am meaning whatever property you purchasing the main idea are for that building to provide shelter for you.
Each of these monopolistically companies sell similar but slightly differentiated properties (products). All the above-mentioned companies do sell commercial properties, farms, agricultural farms and residential properties and within residential properties, we get a wide range of two-bedroom house, bachelor flat, cottage house, etc.
The property market is one of the most popular markets that are open for new suppliers and companies especially the real estate brokerage industry maximizes its profits and doing well in the past years. If a new property company wants to join this industry it can feel free to enter the market since there are no boundaries to enter the market, this also applies when a company wants to exit the market. Real estate industry will grow bigger because its companies earn a lot of profit and this will result in new companies to enter.
Real estate companies will always be in the monopolistically competitive industry since they can charge different prices without having a fear to lose their customers. They will forever be producing differentiated products because heterogeneous is a character of property