Market structure describes the state of a given market with respect to the competition exercised. The major criteria to distinguish between different market structures are: the number and shares of market participants (sellers), the type of traded goods and services and the degree of information flow freedom.
Perfect competition is more a concept than real structure as real markets can only approximate this type of market structure. Perfect market requires no entry barriers, which allow multiple players to enter this market and homogeneity of the goods, meaning that all competitors supply perfect substitutes of each others merchandize.
Examples of the markets close to perfect competition are commodities such as agricultural production In this condition perfect elasticity should arise and no economic profit is expected when long-term equilibrium could be achieved.
Strictly, monopolistic market consists of the only seller, who enjoys absence of competition and is free to set prices for its good (unless regulated). Absence of other options makes demand inelastic towards price. Normally monopolies arise when entry barriers are very strong or entry is explicitly prohibited.
Monopolistic competition arises when there is only one particular seller of certain good, e.g. Dolce & Gabbana suits do not have exact match, however they may be substituted by other products, including both other fashion brands like Gucci or Versace and more chip clothes. This type of market has many traits of perfect competition, except for lower demand price elasticity caused by customer loyalty resulting from non-homogeneous characteristics of the products.
Many markets have traits of oligopoly, the market where several large players possess major market shares, enjoying economy of scale and initial investment barriers as protective measures against other players capturing their share.
Public goods, private goods, common resources, and natural monopolies
Most of the markets and, correspondingly, market structures deal with so called private goods, which are excludable and rivalrous, meaning that it is feasible to prevent certain individuals or group of individuals from its consumption and consumption of the good diminishing its availability for others. Most of the goods fall into this category, starting from bread and finishing by Boeing 747. Due to the excludability and rivalry this type of goods provide entities to gain profits from their production.
Opposite type to the private goods are so called public goods which have two distinctive characteristics – “nonexcludablity”, meaning that the costs of keeping individual from enjoying the goods benefits is prohibitive, and non-rivalrous consumption, i.e. consumption of the good by individuals does affect its availability for consumption by other individuals (Cowen, 2008). There may be no absolutely non-rivaled and non-excludable good; however some goods approximate the concept closely enough, for example national defense or GPS data broadcast.
Common resources is a particular type of good the size or which characteristics make exclusion of potential users from obtaining benefits from it costly, but not impossible. Unlike pure public goods, common resources are threatened by problems of exhaustion, because they are subtractable. Examples of common resources include water and irrigation, soil, forests, fishing and hunting grounds, pastures and the air.
Natural monopolies, a specific subset of monopolies, may arise and permitted or directly created by the regulators in respect to the production of so called “public goods”, were other entities don’t have any economic interest, and “common resources”, which may require regulated consumption.
Market equilibrium and supply and demand of labor
According to the Neoclassical microeconomic model, labor market equilibrium lies on the intersection of curves of aggregated demand for labor hours of all firms in the economy and aggregated supply of labor hours of all the individual worker for given levels of wage (Hoover, 2008). Increased demand for the labor is expected to force firms to reconsider wages they are ready to pay workers in order to employ workers who prefer to stay unemployed at current level of wages, while diminishing demand for labor gives firms will push equilibrium wages down. At the same time shortage of supply caused by ageing, migration, wars, pandemics, etc. would decrease volume of working hours available for given wage levels and therefore would force firms to increase wages in order to sustain production volumes. In contrary increase of labor supply caused by baby booms or migration lower the equilibrium wages.
These shifts in labor equilibrium have different effect on different market structures.
Monopolies and monopolistic competition companies have ability to translate increased labor costs due to equilibrium wage shifts into price of the product as the demand is inelastic or have limited elasticity to price increases, while in perfect competition or oligopoly it would lead to product demand decrease. However increased equilibrium wages imply increased household incomes which may fuel demand for certain products even when prices go up.
Market structure of British East India Company
British East India Company as a classical monopoly was created in 17th century for trading with East Indies. The East India Company traded predominantly cotton, silk, tea, indigo dye, saltpeter and opium. The Company had privileged position in relation to the British government benefiting from granted special rights and privileges, such as trade monopolies and exemptions. With the advent of the Industrial Revolution, living standards in Britain grew dramatically boosting demand for various goods; surging growth of demand for Indian commodities, which was fully controlled by British East India Company. Being monopolist British East India Company could control prices and quantities traded of significant portion of merchandize, being able to receive mark-up covering significant investment related to maintaining troops controlling East India region and providing enormous benefits to company owners and management, which could not be sustained in case of the competition.
British East India Company: the factors that affect labor supply and demand.
Major labor requirements for British East India Company were management and troops. Being a monopolist with significant revenues and leverage to cover growing costs with price the Company could successfully satisfy its demand for labor which increased throughout decades due to expansion of the operations and need to expand military presence to secure its positions in the region as well as growing wage demand resulting from improving leaving standards and boost of the British economy fueled by Industrial Revolution.
Cowen, Tyler. (2008) “Public Goods.” The Concise Encyclopedia of Economics. Library of Economics and Liberty. Retrieved May 15, 2009: http://www.econlib.org/library/Enc/PublicGoods.html
Hoover, Kevin D. (2008). “New Classical Macroeconomics.” The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved May 15, 2009: http://www.econlib.org/library/Enc/NewClassicalMacroeconomics.html
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