Maximizing Profits in Market Structure

Maximizing Profits in Market Structures The subject matter of competitive markets can be complex with many extraneous details that can make all the difference between being a perfect competition, monopolistic competition, a monopoly, or an oligopoly. Each of these types of markets have specific characteristics and economic market effects that include entry barriers, price and output determination to produce the most profits for any given business or company. Even though these differences may seem small, they can determine whether a business can succeed in today’s economy or forever become part of human history. To be categorized as a perfect competition, it must have two of three traits. A perfect competition market has many sellers and buyers and those goods offered by the sellers are mostly the same (Mankiw, 2007). A third trait may be present in the form of free entry in the market by another company producing a similar good. There is a bit of a drawback to this market. Sellers are not able to control the price. The price depends on what the consumers want and are willing to pay or what is called the “market price” (Mankiw, 2007). Determining the output to maximize profits follows “three general rules…:
1. If marginal revenue is greater than marginal cost, the firm should increase its output.
2. If marginal cost is greater than marginal revenue, the firm should decrease its output.
3. At the profit-maximizing level of output, marginal revenue and marginal cost are exactly the same” (Mankiw, 2007, p. 295). At first perusal, this may seem like a convoluted system, but it does help to achieve an economic balance. Simply stated this means the least amount of the entire cost of a good is equal to the price of the good and this stabilizes the market. In addition, because of the similar choices available of the good, the demand curve remains elastic. Related to a perfect competition market, is a monopolistic competitive market. This market category though it has many likenesses to a perfect competition or monopoly but cannot be fully categorized as such. It has some differences. Like a monopoly, it has only a few sellers, and the good that is produced is not as similar as in a perfect competition. To explain more easily, one should consider the markets of novels, and entertainment goods such as movies and computer/video games. While the basic product is the same, it is not exactly like the others. In this type of market, each company enjoys an individual monopoly over their product, but not the overall market. Like a perfect competition, there are no entry barriers and output is determined by producing “a quantity of output below the level that minimizes average total cost” (Mankiw, 2007, p. 380). Furthermore, price is determined by the quantity produced to find its “price consistent” (Mankiw, 2007, p.374). This is achieved when the marginal revenue is equivalent to the marginal cost. Another effect of the market type, is an “excess capacity” (Mankiw, 2007, p. 380) in the economy. The debate about whether this is good for the overall economy is greatly debated by economists. This is what blurs the line between a monopolistic competitive market being a perfectly competitive or becoming an oligopoly market. An oligopoly market is comparable to a monopolistic competition market by having only a few sellers for a good that is similar or identical in nature. The market of tennis balls is a good example of an oligopoly market. Another characteristic of an oligopoly is that like an imperfect competition market, when the “price approaches marginal cost, and the quantity produced approaches the socially efficient level” (Mankiw, 2007, p. 353). To maximize profits in this type of market, marginal costs need to be below the price. When the price is above marginal costs, selling more of the product will increase profits. Unlike a competition market however, oligopolies once had many barriers to overcome to enter. Due to government regulations (Mankiw, 2007) and company self-serving tendencies, and lack of cooperation with each other to help control pricing and profits, oligopolies were once more uncommon. However, oligopolies are becoming more prevalent in today’s economy because of new government regulations freeing up the market and new markets presenting themselves as having fixed providing costs and low service costs to the consumer. These new markets include “technology, media, and telecommunications” (Mankiw, 2007, p. 348). Oligopolies can “produce efficiencies that allow firms to offer consumers better products at lower prices and lead to industry-wide standards that make life smooth for consumers” (Mankiw, 2007, p. 348). There are also pitfalls to oligopolies. They can enable large companies to accrue massive profits but it comes “at the expense of consumers and economic progress” (Mankiw, 2007, p. 348). This is when the government will step in and develop regulations and or laws known as “antitrust laws” that forbid collaboration between these big businesses so a monopoly of sorts does not form to further destabilize the economy and exploit consumers. These government regulations also keeps from having too many monopolies form within the overall economy. Unlike competitive markets, an essential element of a monopoly is there is only one seller. Monopolies develop for three main reasons: “A key resource is owned by a single firm. The government gives a single firm the exclusive right to produce some good or service or the costs of production make a single producer more efficient.” (Mankiw, 2007, p. 353). Such examples include water services, computer operating systems, and even diamonds. The large companies that own the rights or key resource solely are able to determine the market price. Competitive markets do not enjoy this same luxury. Because of this sole ownership, these types of companies can set the price of a good according to how much profit they hope to obtain. For a monopoly to maximize profits, all it need do is lower the price because of the downward sloping demand curve. To simplify, it is the same as a competitive market attempting to maximize profits, a monopoly produces “the quantity at which marginal revenue equals marginal cost” of a good or service. There is a slight curveball to all this however. Depending on the good or service provided, a reduction in the production of the good at times, will deliver higher profits even though less is sold. This tyranny of the urgent happens when the overall well-being of the public is at stake with new technologies, pharmacy medications, and copyright items such as novels and digital data. The study of economic markets is simplistically intricate. Many factors come into play and have the ability to change demand curves, prices, and overall economic impacts. As with all, some of these variables depend upon the integrity and honor of our species, which is not always known for its noble behavior. Based on the facts gathered, studied, analyzed, and mixed with some sleep and chocolate, our general economy needs all these four types of markets to function to its upmost proficiency. Not too much of one, or too little of another, but rather an equilibrium such as exists in nature. An economic utopia. A noble goal indeed, and though simple in theory, successful application has yet to be achieved.

References:
Mankiw, N. G. (2007). Principles of economics (4th ed.). Mason, OH: South-Western Cengage Learning.

References: Mankiw, N. G. (2007). Principles of economics (4th ed.). Mason, OH: South-Western Cengage Learning.