Comparing Market Structures

The below table compares the four market structures: Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly.

Perfect Competition - The below graph depicts the demand curve for a single firm producing a small part of the supply. If the market price of their product applies to all buyers and sellers, they can sell any quantity they want at this price.

Monopolistic Competition - The below graph shows a profitable, monopolistically competitive firm. This shows an elastic, downward-sloping demand curve. The demand depends on the amount of competition to the firm. This curve is elastic because it is easy for customers to leave for the firm's competitors.

Oligopoly - The below graph illustrates a firm that belongs to an industry made up of only a few large firms. The demand curve is downward-sloping and inelastic below the kink as this is when the other firms price match.

Monopoly - The below graph shows a monopoly. The demand curve is not constant as the output is increased.

Oligopoly and Game Theory

An oligopoly market occurs when the market is comprised of a few large companies that dominate an entire industry. Occasionally, a new company makes an appearance in this industry, but entry is very difficult. This differs from a perfect competition market in that they have price control, although it is limited somewhat by consumer demand. It differs from monopolistic competition in that these companies are large firms, and in monopolistic competition the firms are small. Knowing the differences between the markets is very helpful to me as a consumer. It will help me make smart decisions in my purchases, and to know in what industries I will have more choices and price options.

The main ideas behind game theory is that individuals are out for their own personal advantage, and so they all look out to further their own interests in the market. This theory developed through a theory by watching poker games, and how each player looks out for the best moves for themselves only. This was then applied to how individuals lived their lives and make decisions in the market. It looks at how people seek out the best possible action, taking into consideration how their rivals will react. The payoff matrix is a set of decisions or strategy that each individual can make and it’s various outcomes/following “moves”. Once a decision is made, it produces a specific outcome, but if that decision is altered, the outcome is also altered, and the next “move” is affected as well.

Collusive actions are when suppliers agree to set a price of a product or the amount of that product that each will produce. Cartel actions exist when there is a formal cooperation between firms acting in unison.

Defining Monopolistic Competition

Monopolistic competition occurs when you have smaller firms that provide similar products with slight differences competing against one another. They place emphasis on this differentiation in order to draw customers, and to be able to have control over pricing in their market as well.

Monopolistic Competitive Companies

Size:	Small Company	Medium Company	Large Company
Features:
Differentiated products	Big Rock Beer	Kobo	Apple
Control over price	Crave Cupcakes	Air Canada	Starbucks
Mass advertising	Atlas Pizza	Home Hardware	Nike
Brand name goods	Calgary Stampede	Oakley	Toyota

Competing as Starbucks

A perfect competition market is defined as a market where the producer and the consumer have no control over the price of the product is bought and sold for. Starbucks is considered a part of the perfect competition market because the price has been determined by the demand of the collective Starbucks customers – because of the popularity of the brand, prices have increased and are being charged at all Starbucks locations. The individual location and customer have no input on what that price is.

Some main reasons for Starbucks to realign their business practices are is that because they have been so interested in growth and improving efficiency, they have lost some of the characteristics that made them stand out in the first place. By introducing new technologies into their stores, they have increased their productivity and efficiency, but they lost some of the character of grinding the beans, and making their drinks theatrically for the customers, some of the things that made them stand out in the first place. This could be the same reason to close a number of stores. To focus on providing the best possible service to the customers that helped them build into the empire they are to begin with. (Retrieved from http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html September 1, 2012).

Costs and profits have made a big impact on these decisions. The stores that Starbucks are talking about closing are all stores that are not turning a profit and aren’t expected to. Some short-run costs involved with shutting some stores down would be the takedown of materials at the store levels, and the marketing costs of issuing statements regarding the closures and trying to promote Starbucks brand in the midst of negative media regarding closing stores and being responsible for lost jobs. Some long-run costs would be the payout of severance costs and long-term lease obligations that are ended early.

I think that Starbucks coffee is too expensive, but it doesn’t stop me from buying their products. However, for me, Starbucks is a treat – it’s not something that I could legitimize buying every day because then the cost adds up and I look at the opportunity cost of things that I could be spending that money on instead. They are able to charge the prices that they do because they sell a quality product that their customers want, and their customers are paying these prices every day for their products. Because the demand exists for the product, and the price is not impacting that demand, they can continue to charge it. If they lowered their prices, I think that demand would increase because more people could afford their product, or at least could afford to buy it more often. I know for myself, I would visit Starbucks more often if they were cheaper. If there was a increase in demand, Starbucks would have to increase their supply to meet that demand. The graph below shows an increase in demand and supply.

(Retrieved from http://www.econport.org/content/handbook/Equilibrium/shifts-graph.html  September 1, 2012).