Differentiating Between Market Structures Mark Patterson ECO/365 Principles of Microeconomics April 21, 2013 Ashok Padhi Differentiating Between Market Structures There are different classifications of markets and the structure of a business determines which classification it will fall into. Markets are divided according to the composition of the business and what it provides to the specific market. Business composition is determined by the structure of market characteristics, and this helps determine level and area of competition.
The characteristics in a market with the most concentration focus on number of purchasers and retailers, level in which a product has a substitute, price, entry and exit ease, and the level of mutual dependence. These structured variables are classified in the following market structures: perfectly competitive markets, monopolistically competitive markets, monopolies, and oligopolies (Colander, 2010). Trader Joe’s is a grocery store that offers upscale grocery fare such as; organic produce, nutritional supplements, and health foods.
Trader Joe’s was founded by Joe Coulombe and started in 1958 as a small chain of convenient stores in Greater Los Angeles Area called Pronto Markets. Since then, Trader Joe’s has expanded and now has around 375 stores in 30 or more states (“Trader Joe’s Company Competition, 2012). Trader Joe’s market may be viewed as a monopolistic competition, and falls into the grocery industry. A monopolistic market structure is characterized by many companies selling a distinct product in a market easy to enter. This market structure is similar to pure competition, except for the distinct product (Kowitt, 2010).
These market structure classifications are based on the number of barriers and firms to access the market as outlined in Table one below. A perfectly competitive market exists when every contributor is considered a “price taker”, and none of the contributors influences the price of the product it sells or purchases. Two examples of a perfectly competitive market would be milk and gas. There could be many suppliers of both products, and if one supplier wants to raise their price higher than the price the market determines, consumers will go elsewhere to purchase the item in need. Other haracteristics could include: zero entry and exit barriers, zero transaction costs, profit maximization, homogeneous products, and perfect factor mobility (Colander, 2010). In a competitive market price is determined the quantity of product, marginal revenue, and the marginal cost. If the marginal revenue is higher than the marginal cost then the firm can set the price based on those numbers. If the marginal cost outweighs the marginal revenue, then the firm begins to lose money. The firm is looking for the right number that will maximize profits by having a higher revenue than cost.
The firm maximizes profits based on output by determining the balance between marginal cost and marginal revenue. If the firm’s marginal revenue is higher than the marginal cost the firm will increase the output to reach the balance. A firm with a higher marginal cost, the marginal revenue will then reduce the quantity output until it reaches the balance. If the firm has reached the revenue equal to the cost at a set output, then the firm has maximized profits based on output. Barriers to entry are considered low as only a small investment may be required to enter the market.
The role that competitive market plays in the economy is it tries to maximize profit, which equals total revenues minus total cost (Colander, 2010). Trader Joe’s strategic plan is making customers an integral part of creating the shopping experience, and providing customers a unique, interesting, innovative shopping experience as well as providing products that great tasting, hard to find, and from around the world. This has made it possible for Trader Joe’s to differentiate themselves from their closest competitors, Whole Foods, and Bristol Farms.
According to Jay Barney, a Presidential Professor of Strategic Management and Pierre Lassonde Chair of Social Entrepreneurship at the University of Utah, in order for Trader Joe’s to be successful long term, it must possess a defensibility strategy that contains four requirements: rareness, value, non-substitutability, and inimitability. Though these conditions are tough to achieve through the four traditional marketing P’s (product, price, place, and promotion), Trader Joe’s added a unique fifth P of culture to construct walls around its competitive space (Mallinger ; Rossy, 2007).
Trader Joe’s is able to accomplish this because it provides value primarily by their adventurous shopping experience that is different from those of traditional markets: low price, casual, high service with constant and unpredictable mix in product. Its uniqueness makes it difficult for their competitors to copy, and their specific consumer target makes it almost impossible to replicate by companies serving a wider range of competitive space (“Trader Joe’s Company Competition, 2012). Monopolistically competitive markets are those that involve industries such as clothing, eateries, footwear, as well as in the service area.
A monopolistically competitive market can be characterized as having an abundant amount of both manufacturers and consumers, consumer’s preferences for purchasing is known; survival in this area consists of the seller trying to distinguish specific products from competitors. A monopolistically competitive market could endure restrictions with entry and exit, the market is essentially heterogeneous in nature, and a market of this could lead to the increase of non-price rivalries (Colander, 2010).
By the side of equilibrium, businesses come to a zero economic profit position and no business enters or exits the industry. An increase in the number businesses in the industry will result in a positive profit, and the opposite will occur in the case of a negative profit. This would provide a business the opportunity to put forth an extensive influence over an open market by raising the prices and maintaining the consumers they may have. In a monopolistically competitive market, the productions of goods never act as a complete replacement, but as a close substitute (Colander, 2010).
Monopolies are a group of business people who act as one. Any firm that has a monopoly structure will have the most price control for its goods. The firms that operate in competitive structures will have no control over their prices. Price management is when a firm has the ability to control the prices of its products. Public ownership is not common in monopolies and there are no price takers. A monopolist ensures the price for a product or service will surely increase profits. When marginal cost equals marginal revenue the profit maximizing price and output is at the same position.
In the perfect competition output is less. Monopolist could earn some economic profits, if there are no entries of new firms that exist. Microsoft is a monopoly because there are few competitors. Microsoft is supervised by contracts and patents that create strong barriers for its potential competitors. Barriers in a monopoly are thought of as low, because a small investment would be used to enter the market. Barriers to entry for monopolies are high fixed costs, licenses, etc. limit entry.
The role monopoly plays in the economy is if the firm lowers the cost for its product; the firm must lower the selling price of all units. Then the decreased price pertains to all the units that are sold and not just the previous or the marginal unit. When a monopoly charges more and produces less, they cause a price discrimination which raises economic welfare or causes deadweight losses. These things are not always beneficial to society (Colander, 2010). Oligopoly is a market that controls a commodity and is dominated by a small number of firms that act on one’s behalf.
Prices placed on products by every firm included are close to matching because if one firm tries to change the price, this will cause other firms to do the same thing. A significant characteristic of an oligopolistic market structure is the mutual dependence of firms in the industry. The mutual dependence, real or apparent, occurs because of the small number of firms in the industry. When an oligopolistic firm’s prices or production change, it will cause noticeable effects on the sale and earnings of competitors in the industry. The firms should consider the reaction of others when formulating its prices or output decisions.
The barriers can involve patent rights of the firm, accessibility of resources, financial requirements, and access to the applicable equipment. The role that oligopoly plays in the economy is that if the firm cuts prices, then other competing firms will match the price reductions. If the firm raises its prices of its products, then other firms will not match the price increase. There are no barriers to entry in an oligopoly. Oligopoly opened up the world to free trade which makes things better for the economy. Having free trade increases the benefit of countries all over the world (Colander, 2010).
For strategies, Trader Joe’s should continue with its targeted and strong organization culture that is one difficult to develop, and that provides customers with a shopping experience difficult to find. It will always be easier for competitors to do the same, but never to imitate who you are. Also, though their prices are reasonable, they are not as low as other grocery stores options. Another recommendation would be to offer lower prices, this way; they will gain customers not only for a change in food preferences, but also for great competitive prices in comparison with regular grocery stores (Mallinger & Rossy, 2007).
References Colander, D. C. (2010). Economics (8th ed. ). New York, NY: McGraw-Hill. Kowitt, B. (2010, August 23). Inside the secret world of Trader Joe’s – Full Version. Retrieved from http://money. cnn. com Mallinger, M. , & Rossy, G. (2007). The Trader Joe’s Experience. Grazialdo Business Review, 10(2), 1. Retrieved from http://gbr. pepperdine. edu/2010/08/the-trader-joes-experience/ Trader Joe’s Company. (2012). Competition. Retrieved from http://www. hoovers. com/company- information/cs/competition. Trader_Joes_Company. cd133847612c3f8c. html