Economic Market Structures
Industries are classified into four different market structures. They are perfect competition, monopolistic competition, oligopoly and monopoly. Each of these has different characteristics regarding the number of firms involved to the type of product they make. Different methods and restrictions are used to maximize profits in all markets of the economy.
Brand management and advertising are two tools that firms used to differentiate their products. The main objective of brand management is to help sustain product differentiation over an extended period (Hubbard & O’Brien, 2010 p. 415). Firms use advertising to make a product more inelastic with a main goal of increasing sales at any price, and having the ability to increase prices without affecting sales (Hubbard & O’Brien, 2010, p. 415). To remain competitive, firms must rely on costly tools such as brand management and advertising which can lead to increased costs for consumers.
Advertising is an extra expense for firms that can often lead to a greater yearly profit. Firms advertise through print, television ads, and in a multitude of ways on the Internet. As a firm has to spend more money to sell a good, the firm must in turn, raise the price for that good. In this respect, advertising can have a very negative effect on consumers because it can drive up the prices of goods. Advertising can also be beneficial to consumers in that it can lead to a more informed purchasing decision by the consumer. Advertising can have a positive and negative effect on firms and consumers.
A Monopoly firm can charge prices higher than the marginal cost. These firms differentiate their products to appeal to the consuming public. They try to obtain and keep that customer through product differentiation. Many consumers will pay a higher price for a product that is best related to their wants and tastes. A government patent gives that firm an exclusive right to a new product for 20 years from the date of invention.
Brand management and advertising are two tools that firms used to differentiate their products. The main objective of brand management is to help sustain product differentiation over an extended period (Hubbard & O’Brien, 2010 p. 415). Firms use advertising to make a product more inelastic with a main goal of increasing sales at any price, and having the ability to increase prices without affecting sales (Hubbard & O’Brien, 2010, p. 415). To remain competitive, firms must rely on costly tools such as brand management and advertising which can lead to increased costs for consumers.
Advertising is an extra expense for firms that can often lead to a greater yearly profit. Firms advertise through print, television ads, and in a multitude of ways on the Internet. As a firm has to spend more money to sell a good, the firm must in turn, raise the price for that good. In this respect, advertising can have a very negative effect on consumers because it can drive up the prices of goods. Advertising can also be beneficial to consumers in that it can lead to a more informed purchasing decision by the consumer. Advertising can have a positive and negative effect on firms and consumers.
A Monopoly firm can charge prices higher than the marginal cost. These firms differentiate their products to appeal to the consuming public. They try to obtain and keep that customer through product differentiation. Many consumers will pay a higher price for a product that is best related to their wants and tastes. A government patent gives that firm an exclusive right to a new product for 20 years from the date of invention.
References: Hubbard, R. & O’Brien, A. (2010). Economics (3rd ed.). Boston, MA: Pearson Hall. Market Structures Table Perfect Competition Monopoly Monopolistic Competition Oligopoly An example of an organization or industry (what good or service is produced?) Organic apple growing industry. US Postal Service. Delivers first-class mail Computer Industry The automobile industry. They produce vehicles for consumers Are the goods or services identical within the market or is there product differentiation (brands)? This industry sells identical products, there is no product differentiation. This is the only organization in the industry that performs this service. The products are similar but not identical. Each brand offers different services, software, and packages. In a differentiated oligopoly, they produce similar but not identical products with specific branding Barriers to entry? Advertising? There are no barriers to entering this market. Entry into this industry is blocked. Barriers to entry in this industry are low. Some brands use advertising such as Dell and Apple. Three barriers to entry are economies of scale which is when a firm’s’ average costs decrease as output increases; ownership of a key input which would be steel and government imposed barriers such as tariffs and quota limits. Are there many organizations or firms in the market, only a few, or only one? There are many firms in this market. They are relatively small in comparison to the whole market. The United States Postal Service is the only organization in this market. There are many firms in this market. There are a few interdependent firms in the market such as Ford, GM in the U.S. Economic profits: Do positive economic profits exist in long-run equilibrium? No. In long-run equilibrium, firms often break even on economic profits. They only earn profit in the short term. Yes. Because nobody else is allowed enter the market, there will be continuing economic profits in the long run. No. In the long-run monopolistic competitive firms will not have economic profits or losses. Firms have difficulty earning economic profits in the long run. The firms must consider the effects of their actions on the others in their industry. The on-going competition in this industry makes it difficult.