Market Structures

Running head: Market Structures

Market Structures

MBA501

University of Phoenix Online

Market Structures

McConnell and Brue (2004) describe four market structures that companies align themselves with during the course of their corporate lives. This paper will give examples of the four market structures: Pure Competition, Pure Monopoly, Monopolistic Competition and Oligopoly. Companies may move from market structure to market structure over the course of growth and time. This movement between structures may be the result of product changes, introduction of competition or consumer interests. This paper will describe one such company that has made the migration from structure to structure.

According to McConnell and Brue (2004), pure competition is “a very large number of firms producing a standardized product”. This is the case with the corn industry. One example of a pure competition corporation is “Farmers Cooperative Association” (FCA). A Farmers’ Cooperative Association is a group of farmers, at their convenience, who come together to form a co-op in order to: improve bargaining power; reduce costs; obtain market access or broaden market opportunities and improve product or service quality (Nebraska Department of Agriculture, n.d.) that would normally not be achieved as an individual farmer. In doing so each farmer pays a fee to the Cooperation. The Cooperation itself is normally a non-profit organization in that the profit is realized back to the members supplying the product. Pricing is determined by the Board of Trade and is typically not negotiable. Cooperatives can hold corn at the request of its members in order to obtain a better price. However, in today’s farming environment it is common to sell the corn prior to even producing it (Tim Jimenez, personal communication, March 4, 2007). The federal government also controls the price to some extent by offering monies to farmers not to plant or plant more of a product which either raises the prices because supply is not available or lowers the price if there is an abundance of supply. What ever the price is in the end the farmer ends up taking it or referred to as “price takers” (McConnell and Brue, 2004). The farmers individually do not have the volume to effect price, but the group as a whole can have an effect.

In economics, a monopoly is defined as a persistent market situation where there is only one provider of a product or service (Wikipedia, 2007). In a monopoly, a single firm is the sole provider of a product or service. There are no close substitutes, so there is no competition. If a monopoly is not protected from competition by law, meaning a legal monopoly, it may be subject to competitive forces that pressure it to keep prices low in order to dissuade competition from arising. An example of this is Macintosh computers. Apple is the only company that manufactures Macintosh system on computers. The Macintosh, or Mac, is a line of personal computers designed, developed, manufactured, and marketed by Apple. Production of the Macintosh is based upon a vertical integration model in that Apple facilitates all aspects of its hardware and creates its own operating system that is pre-installed on all Macintoshes. This is in contrast to PCs pre-installed with Microsoft Windows, where one vendor supplies the operating system and multiple vendors create the hardware, like Dell, HP, and Compaq (Wikipedia, 2007). Macintosh’s pricing or non-pricing strategy has reduced them to a small customer base. When looking at the approach Macintosh took as opposed to Microsoft, who charged low prices and sells an enormous amount of software, Macintosh charged higher prices for their product, which resulted in a fewer number of people buying. Back in 1983 Apple may have been selling its computers at an attractive price. But the coming of the IBM clones made Apple's prices look downright hideous. In the face of ever-stronger competition, the company insisted on pricing the Macintosh to maintain at least 50 percent profit margins; its "50-50-50 rule" told managers to keep margins up to maintain the stock price. Customers who paid their own personal money for Macs might be able to justify the high price simply because the computers were fun and easy to use. But business managers who paid Apple prices for any but the most specialized applications, notably graphics-intensive work, were either fiscally irresponsible or just plain dumb. Apple's pricing strategy handed the vast business market to computers running Microsoft operating systems, first DOS, and then Windows (Postrel, 1998).

The insurance industry’s market structure is