Question

Nick runs a small business conducting online economics tutorials. He has recently noticed a large influx of competitors to this market. There are now over 50 companies conducting online economics tutorials in Melbourne alone, each with their own technology and style of teaching. What kind of market structure is this? Make sure you examine each of the characteristics of market structure in your answer. Explain whether the government should be worried about any aspects of this market structure. How can the government address these concerns?

Answer 1

A market structure defines the competitiveness of a market and the nature of the market which is an essential factor that determines the pricing policy of a market. It is determined on the basis of various factors like the ease of entry and exit mechanisms of a market, the number of companies/sellers and buyers of the market, distribution of market share etc. Thus, in accordance with the above factors, there have been four major market structures identified in the global market. They are Purely competitive market, monopolistic competitive market, oligopoly market and a pure monopoly market. A pure monopoly market has a single seller and the pricing mechanism of such a market would be completely determined by the single seller. In an oligopoly, a few firms would have control over the market and the pricing mechanism would be determined by the collusion of the strategies of those firms. In a monopolistic competitive market and a purely competitive market, a large number of small firms would be competing against each other with a difference that in a monopolistic competitive market, the firms would be selling similar products whereas in a purely competitive market, it may not be the case.

                                    The given case represents a monopolistic competitive economy since more than 50 companies are in operation selling the same commodity/service, online economic tutorials. Here, although the products are similar, smaller variations from the marketing and representation in the market would mean that there would be increased competition among those firms. The differentiations include many factors like change of brand name, location, pricing method etc. Such a market would have the power to charge higher prices within a range only and the consumers of such a market would gain advantages of the increased competition of such a market. With increased competition in similar products, it can be expected that the quality of service in such a market would be higher and the entry and exit mechanisms in such a market are easier.

                                    The following would form the major worries of the government in such a market structure and the ways to tackle them

· Such a market structure would have only few ways to increase the profits and thus the employees of such a market would be having the threat of reduced income levels

· There is high risk for each firm as the consumer may prefer one over the other with increase benefits as the products are more or less similar.

· The advertisement costs for the firms in such a market would be more and this would result in reduced profit levels even for the best competent firm.

· Some differentiation factors do not create utility and thus would be non-utilitarian for the customers.

· There would be allocative inefficiencies caused by the profit maximisation approach as the price would be above marginal cost in most of the times

· The government in such markets would have to resort to practices like ensuring minimum wages for all competing firms to help the labour force of those similar markets.

· The firms of such a market would also be given proper care so that most of them would not be destroyed due to inefficiencies and challenges which would force them out of the market.

· With average pricing mechanism, both the competitors and the customers would have shared benefits of the market structure.