This week we are focused on the different environments in which companies operate and the market power related to each of these environments.
The environment in which a company operates is referred to as a market structure. There are four primary structures: perfect competition; monopolistic competition; oligopoly; and, monopoly. A perfection competition has no market power to influence pricing while a monopoly has market power because it can set prices and in turn increase profits. The other two structures vary in degrees of market power based on combine characteristics of both competitive and monopolistic structures.
1 – Select one of the major market structures outlined on page 173 of the text (screenshot), and then identify two existing companies that you believe represent this structure and explain why.
The level, or degree, of a companys market power is directly related to the principle of barriers into the market. Barriers are defined as any structural, legal, or regulatory characteristics of the company and the market structure that prevent other companies from producing comparable products at the same costs. Firms with market power will use several strategies to create these barriers: pricing; cost reduction; and, new product development.
2 – Using the Herfindahl-Hirschman Index on pages 215-216 of the text (screenshot) identify the market power of at least two companies.