Market structures can be defined as big institution of organizations or firms that are distinguished by common features, which determine how firms compete and set prizes to the common features of a market, are several and each has influence on price and competition. In this chapter, we center the attention on how the structures influence prize and output decisions of business. Some of the features of a market are; the number of firms serving it, costs involved in production of goods or services, the type of customers and how many, distribution of market share among the firms and the products (Riley 91).
There are several types of market structures, which affect price and decisions in a different way. The first market we look into is perfect competition. An example of perfect market is in retail firms such as provision stores. They sell homogenous goods. In this market, there are many firms and many buyers selling similar goods in the market. Firms under this market do not set the prize but rather, it is set by the market and economic policies. An example is in milk industry where the government sets a range. Their profits are determined by amount of sales. Demand and supply affect this market directly. When demand is high, prizes go up and when supply is high, prizes go down.
The other market structure is monopoly. This refers to a scenario of having only one seller or producer of a certain product. In this market, the one seller, supplies goods to all the buyers and hence, he has total control of the market. He sets the prizes as he may deem necessary unlike in perfect competition where the prize is set by the market. The market is characterized by huge abnormal profits given that there is no competition. Other firms do not affect their output and decisions. They make few goods and sell them at high prizes. They use entry barriers to prevent potential competitors from entering the market. The opposite of this is monopsony, where there is only one buyer to a particular product. Monopsony influences the price on suppliers since there are no other buyers. An example is a company is the only producer of soft drinks in a particular region.
Oligopoly market structures refer to few firms serving a big market. In this type of market, competition among the few firms is normally stiff. Each firm is aware of the other. A decision from one firm affects the others directly. For instance, when one lowers the prize, others follow to retain their markets. This is because they have relatively homogenous goods. An example is few wireless mobile operators in some regions. Oligopolies affect the price in various ways. Since they are few, it is easy for them to agree on a prize. They could increase the prize to achieve profit maximization, which is very common in this type of market. This behavior is referred to as cartel. Oligopolies are near to monopolies.
Market forces are the factors in the market that affect businesses operations such as prize. These factors can include supply and demand, market information, and suppliers. One best way of understanding market forces is using the Porters’ five forces model. One force in market that affects businesses is the power of suppliers. Suppliers have a commendable influence to a business. When there are many suppliers of an item, they have less power. This is ideal to the business because there is guarantee of supply at fair prizes. When there are few suppliers in the market, they have the power to set prizes high, limiting access to the goods. An example, in a business Y, which makes shoes, where the suppliers of leather are many, they will have influence on them and can, set the prizes for the farmers. On the other hand, if the supplier of the production machinery is one or few, the business will have no power of bargaining. This forces the business to respond in a way that balances on both sides. It is important to note that power of supplier will depend on the availability of materials, and the number of suppliers in the market. This factor determines what business one can do and how.
Another force is the rivalry in competition that generally analyses the power of the competitors. When you have many competitors, who offer good services, you have no power over the market and you respond accordingly by offering better services and goods to retain the customers. A movement in the market dictates that you move with them. This forces the business to follow the market leader. When a business has few competitors, it can have power in the market to change situations such as prizing because buyers and suppliers will not have much influence on the business since they may not get a better service anywhere else. In such a situation, you do not need to do much about the products. Businesses have to respond to competition in the best way to fight it. A few points considered before making a decision are the number of competitors, the differences that are there in products, the cost of substitution and costs involved in leaving a certain market. This is the questions that businesses seek to answer appropriately especially new comers in an industry (Etro 39).
The opposite of supplier power is the bargaining power of buyers. This force analyses the power of buyers and their influence on the prizes. The things analyzed in this market force are; the number of buyers in a market. Too many buyers will not have a bargaining power since there is another buyer willing to buy. When they are few, they have the influence as you have to impress to win them. Another consideration is how they react to changes in prizes. If they are perceptive about the prize, you have to consider before changing of prize. Then, the type of goods determines the number of suppliers. When you sell bulky goods needing a big order from few corporate buyers, each of them becomes very important.
A business cannot afford to lose such a buyer since it has a significant loss. Such buyers have a very big influence on the prizes. How easily the products can be substituted with others is a factor that influences prize. When goods are highly replaceable with others, it is easy for customers to change preference in case of a change in the product. When a new business is planning to enter a market, these forces in the market will determine its viability in the new market. For existing businesses, it is important to observe the changes since they have a direct influence.
In an industry, how easy it is to enter, is another force that influences other potential competitors from entering the market. If your business is easy for others to start, in terms of capital and time it requires, then it is likely that you will have many competitors who will trim down your position in the market. When it is hard for them, your chance of remaining strong is high and you are not under much pressure from competitors. This force determines how strong a business remains and how you operate. If it is easy, one will need to use strategies that create customer loyalty. For big businesses, they need a lot of advertising to capture bigger market share to lessen competition. An example is in a retail business, where it is easy to enter the market. Here the businesses cannot do much to stop new entrants. How you serve the customers is the determinant to how well the business can do. In large businesses such as heavy production, it is hard to enter hence since the costs involved are high. The existing businesses can easily put barriers to entry by taking advantage of economies of scale to reduce prizes (Lucas 90).
The cost of leaving the market for another is a force driving businesses in persisting evev in areas not very profitable. Many heavy production units are expensive to put up and withdrawing will mean even bigger losses to the company. This makes it hard for such companies to leave markets. For this reason, they have to keep innovating so that they keep up in business. On the other hand, small businesses can easily enter other markets, which are more promising and hence do not need to keep innovating.
External factors that may have influence on businesses, “business environments,” are those environments under which, the business operates. The business cannot influence them. They can only live under them. They include economic, technological, and social environments. Cultural environments fall under social category. Cultural environments play a key role in determining what business one can or cannot do. For instance, it is a taboo to eat pork in Islamic culture. This culture reads out that you cannot start a pork industry in this environment. Economic environments determine the practical viability of a business in a certain area. Different countries have different economic rules. Technology is also important as it influences how easily businesses operate. Different cultures have different opportunities that businesses can exploit and it is up to the firm to identify them (William & John 27).
Taking an example of company XYZ, which is a cloth line producing industry in several countries, it has to adapt to several environments. In country A, where people are open to different attires, the business is very prolific. The company produces many brands to serve different customer tastes who buy them readily. In country B, people are restricted to certain style especially women. They cannot wear revealing clothes or tight ones. In this country, they can only produce clothes that abide to their style. This is the effect of cultural environments, which states that in country B, there cannot be many designs.
In country A, the economic state of people is high, the government provides few incentives, and cost of production is easily manageable. In country, B the economic status is low and buyers are not willing to purchase at high prizes. The government tax rates are higher for foreign companies. This forces the company to ensure maximum cost reduction to make profits. Technologically, in country ‘A’, it is fast to produce clothes because of the availability of technology. In country ‘B’, it is the opposite. It is easy to conclude that environments shape organizations in different ways.
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