The structure of the market, that is, the type of interplay that occurs, is defined by the number of businesses, the types of barriers new firms face when trying to enter that particular market, and the interdependence of businesses in determining pricing and output to maximize profits. Economists generally recognize four forms of market structure: prefect competition, monopolistic competition, monopoly, and oligopoly.
Perfect Competition Results in Businesses Failing
In a market structure of perfect competition there are many buyers and sellers and each one sees the going price as a given. Anyone can enter the market since there are no barriers to entry and each business in the market sells the same thing. All involved in the market knows all the particulars about the market and each other. Each business is in business for as much money as can be generated.
Making a profit in a perfect competition market structure seems difficult. Prefect competitive markets do not work in the long-run and do not exist in the real world because it would be impossible to make a profit. Each new business entering the market comes in with a lower price. The businesses already in operations much lower their prices until they are making zero profits.
This was proved out in the Parkrose area of Portland, Oregon, the “far northeast,” where adult care homes are a surplus. Armed with all the particular information of each home in the area – owner, number of staff, cost of room, board, and service – potential clients visit the establishments as a pre-cursor to the loved one moving in. The visitors would compare the room sizes, activities offered and the amount of care their loved one needed to the going price.
In the Parkrose area, each owner's going price for a similar sized room (10 feet by 12 feet) was pretty much the same. Each time a new home opened, it opened with a lower starting price for the same sized room. Finally prices were lowered to point that the starting rate was $1,800, whereas, before area saturation, the starting price for a 10x12 room was $2,200. At this $1,800 price, many homes, like the Parkrose Welcome Home, could not function at that rate and had to shut down the business.
The owners of Parkrose Welcome Home were able to recoup their investment by selling their house to a person who wanted to operate the home as a place of care for the developmentally disabled. Since the new owner’s clientele were not the elderly, the market structure was more monopolistic than perfectly competitive. Therefore, for the new owner, the going price did not apply and was not a given.
No One Likes a Monopoly but the Owner of the Monopoly
Lone ranger is a term that can be applied to a seller in a monopoly market structure. New companies often run into barriers to entry into the market that are either cost or politically related. A business in a monopoly market structure can set its price as high as the market will bear.
The United States Postal Service is a monopoly as far as non-urgent mail delivery and postage is concerned. By law, no other business or person can deliver non-urgent mail or sell postage.
The United States Postal Service can also deliver urgent mail and deliver packages if it so chooses and it does. The United States Postal Service can be a competitor to UPS, DHL, and FedEx, but UPS, DHL and FedEx cannot be a competitor to the USPS. They are prohibited by law from delivering non-urgent mail and selling postage.
A business that is a monopoly usually ceases to be eventually, because of the many oppositions to its existence. Monopolies make market entry difficult and sometimes impossible for new businesses. For that reason, new business owners resent monopolies and oppose them. Consumers don't like monopolies because they charge more than is acceptable and or fair.
Opposition to the monopolistic state of the United States Postal Service began in the 19th century, continued in the 20th century, and is still raging in the 21st century.
Monopolistic Competition is the Result of Opportunity Knocking
Monopolistic competitive markets have many buyers and sellers since there are no barriers to new businesses entering the market. Each business sells a product that is somewhat different from its competitors. In monopolistic competition a business gains an advantage by differentiating its product in an improving way that is better than its industry peers.
In the 1990's the California Air Resources Broad (CARB) issued a mandate for zero-emission vehicles that prompted a suit from the big three automakers that forced CARB to withdraw the mandate. Even though the California Air Resources Board lost the suit, its mandate sparked similar courses of action from other smog choked cities across the country, in Europe, and Israel and in the process created a large demand for zero-emission vehicles.
Car enthusiasts have been entering the auto making industry to fulfill the demand for zero-emission vehicles. One such company is Tesla Motors. Tesla Motors as well as other zero-emission automakers are presently selling vehicles and as demand increases prices will decrease to that of combustion automobiles.
The advantage of zero-emission vehicles is providing a gasoline free machine to a consuming public whose health is threaten by smog, who is fed up with rising gasoline prices, and who is tired of a dependency on foreign oil. Their limitation is providing the vehicle at an affordable price for middle income families.
The one drawback of auto manufacturing is the set up cost of the assembly-line. Automaker must mass produce its vehicle to recoup the setup cost; otherwise vehicles will be too expensive for the majority of consumers. The automaker cannot mass produce if there is not a paid demand for the product.
Oligopoly is the Monopoly of Two or More
In an oligopoly market structure is it advantageous for the businesses to match prices in order to maximize profits. Instead of undercutting each others’ price, the companies in this market set a price that would maximize profits for each company. Undercutting prices will only cause the companies to lose profits. Each company would gain more from agreeing on a price.
It seems that is what the urgent mail delivery companies have done: agreed on a price. In the United States, the urgent mail delivery companies FedEx, DHL, and UPS are in an oligopoly market. By law, these companies, and any other company wishing to enter the market, can only deliver packages or “urgent mail.”
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