Forms Of Industrial Organization

FORMS OF INDUSTRIAL ORGANIZATION

Introduction

“In economics, market structure describes the state of a market with respect to competition” (Peterson, 2008). The major market forms are monopoly, oligopoly, monopolistic competition, and perfect competition. A monopoly exists where there is only one provider of a product or service. An oligopoly “denotes a situation where there are few sellers for a product or service. The members of an oligopoly change the nature of a free market” (Peterson, 2008). Monopolistic competition exists where there are a large number of companies which have a small share of the market share. Perfect competition occurs when the market consists of a large number of companies producing a homogeneous product.

Monopoly

A monopoly is an “economic situation in which only a single seller or producer supplies a commodity or a service. For a monopoly to be effective there must be no practical substitutes for the product or service sold, and no serious threat of the entry of a competitor into the market. This enables the seller to control the price” (Peterson, 2008). Since the enactment of the Sherman Anti-Trust Act in 1890 monopolies have become almost nonexistent. One example of a monopoly is easily cited, it held a monopoly until recent years and some may argue still does, De Beers.

“For most of the 20th century, De Beers sold 85% to 90% of the diamonds mined worldwide. With this leverage, it could artificially keep diamond prices stable by matching its supply to world demand. Rockefeller's Standard Oil and Gates' Microsoft may have briefly approached this kind of dominance, but the length and extent of De Beers' supremacy is unprecedented” (Stein, 2001). Because De Beers controls the supply, even going so far as purchasing competitors surplus, the company also controls the price of the world’s diamonds. “Analysts say De Beers is succumbing to the inevitable - that competition has been chipping away at its market control to the point that it isn't even a monopoly anymore. But old names die hard, and the U.S. government still bans the company from doing business there because it's deemed a monopoly” (Keaton, 2000).

Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers or oligopolists. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of one firm influence and are influenced by the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and industries to be at the highest risk for collusion(Wikipedia, 2008).

The new oligopoly is made up of multinational corporations that have chosen specific product or service categories to dominate. In each category, over time, only two to four major players prosper. Starting a new company in that market segment is difficult, and the few that do succeed are often gobbled up or run out of business by the oligopolies.

Few multinationals aspire to be monopolies. Monopolies attract government regulation and consumer anger just as Microsoft. Small oligopolies such as Coke, Pepsi, and Cadbury-Schweppes make plenty of money and avoid the constant attention of the regulators, as they dominate the soft drinks market commanding over 75% of the total market(Hannaford, 2007).

This tendency toward oligopoly is accelerating, as fewer and fewer companies grapple to control the limited mind space(Hannaford, 2007). Within the book industry, there are now far fewer major players on the production and distribution side. A few large conglomerates such as Bertelsmann, The News Corporation, Viacom, and, until it recently pulled out of the book business, Time-Warner, publish most leading titles, along with chains like Barnes & Nobles and Borders. These chains also dominate retail sales along with online shopkeeper Amazon. These series of changes have been brought about by a series of mergers, acquisitions, and bankruptcies over the past thirty years.

The automobile industry in the United States is an oligopoly because only six firms, General Motors, Ford, Chrysler, Honda, Toyota, and Nissan, account for almost 90% of U.S. Automobile sales. We see that as the new auto model year gets under way in the fall, one car manufacturer's reduced financing rates are quickly matched by the other firms because of recognized mutual interdependence.

Monopolistic Competition

When a “market with similar but distinct products” exists and forms a “market structure in which a large number of companies sell products that are similar but with distinguishing features” it is said to be in monopolistic competition (Peterson, 2008). Subway is a company that is considered to be in monopolistic competition. The industry has many sellers, such as, Quizno’s, Firehouse, Jersey Mike’s, and Jimmy John’s. The products Subway sells are differentiated by their assertion that there subs are made with the freshest ingredients and made in front of the customer as the order is place. Subway also offers several different bread choices, as well as an array of sandwich toppings. Subway is able to price its sandwiches independently of the other restaurants that sell similar sandwiches.

Perfect competition

There are two extreme forms of market structure: monopoly and, its opposite, perfect competition. Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes such as the Family Dollar, Dollar General and the Wal-Mart conglomerates. Perfect competition means there are few, if any, barriers to entry for new companies and prices are determined by supply and demand (Investopedia, 2008).

Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage. For example, in a perfectly competitive market, should a single firm decide to increase its selling price of a good, the consumers can just turn to the nearest competitor for a better price, causing any firm that increases its prices to lose market share and profits(Investopedia, 2008).

In contrast to a monopoly or oligopoly, it is impossible for a firm in perfect competition to earn abnormal profit in the long run,