Question

Sorry guys need to pick your brains on this.

a. What kind of market structure is Ace Body Gyms operarying within? Compare and contrast it with the three other market structures you have studied based on price, output and profit. Be sure to include graphs in your discussion.

b. Explain the barriers to entry that might exist in the market in which Ace Body operates

Would appreciate your help.

Cheers,

Ali

Answer 1

Hi Ali,

I have answered your question. Please let me know in case of any query.

Answer (a) –

By market structure, we mean the different type of market like perfect competition, monopoly, monopolistic or oligopoly. Each of the market structure differs from each other on the basis of the number of economic agents transacting in the market (i.e., the buyers and sellers), the degree of differentiation of the products that the producers sell, barriers to entry and exit, etc.

Ace Body Gyms is operating within a monopolistic structure. This is because of the following reasons:

1) Many firms : Ace Body Gyms have many existing competitors in the market. So, there are many firms selling fitness services in the industry.

2) Ace Body Gym can freely enter or exit the market because there are no barriers to entry or exit.

3) The different competitor firms of Ace Body Gyms are selling differentiated products. Each firm is the market does not have a homogeneous product. Rather there is some degree of differentiation among the fitness services provided by the gyms in the industry, even though these services are close substitutes.

Now let us contrast the monopolistic market structure of Ace Body Gyms with the other three market structures.

· In perfect competition, the firms are price taker such that the demand curve is a horizontal straight line. The profit maximization condition is P = MR = MC and the equilibrium quantity is determined when the profit maximization condition is satisfied. The firms is perfect competition sell homogenous products and there is no barrier to entry or exit. So, even though the firms earn positive economic profits in the short run, they would earn zero economic profits in the long run.

· A monopolist, on the other hand, is the sole seller in the industry. However, it does not mean that the monopolist can charge whatever price he wants. The monopolist faces a downward sloping demand and MR curve which implies that the price the monopolist receives for each additional unit of output sold declines, if the monopolist wants to increase the amount of output sold. The profit maximization condition for the monopolist is MR = MC and the equilibrium quantity is determined when the profit maximization condition is satisfied. The equilibrium price to be charged by the monopoly is determined from the demand curve faced by the monopolist. Monopolies can maintain positive economic profits in the long run, because there are barriers to entry in the market and potential sellers cannot enter the market.

· In oligopoly, there are few sellers in the market who entry a high degree of market power and the actions of one firm significantly impacts the action of others. In oligopoly, the small number of firms collude to restrict output and fix prices, such that they can earn supernormal profits. The profit maximization condition for oligopoly is MR = MC. Oligopolies can maintain supernormal profits in the long run because high barriers of entry restricts potential competitors from entering the market and claim excess profits.

(b) The barriers to entry and exit into and out of the fitness industry is low because the market structure of Ace Body Gyms is monopolistic competition. This results the gym to price its services competitively because recently there is a trend that people are shifting to more budget friendly gyms. Another feature of monopolistic competition is high expenses on advertising which might be an example of barriers to enter/exit the fitness industry.

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