Four Market Structures

The behavior of a specific firm in regards to deciding where to price a product and at what production level to produce depend greatly on what type of market structure it operates in. There are 4 markets structures in which firms operate: pure competition, pure monopoly, monopolistic competition, and oligopoly.

Quasar Computers began its business in 2003 in a pure monopoly market due to the fact that it had pioneered an all-optical note-book computer, branded “Neutron”. As its sole supplier, Quasar Computer had total control over its price over the next 3 years, which was the life of its patent. To start out, Neutron was priced at $2,550 with production level of 5.2 million units, with profit of $1.29 billion. This was the price and production level combination that profits were maximized. Which means Marginal Cost and Marginal Revenue were equal. As the nature of this market, firms typically didn’t need to spend much on advertisement since there were no competitions. However, because the Neutron did not reach a wide spectrum of consumers, Quasar Computer’s executives decided to increase the advertising budget and spent more on improving production to help with getting the Neutron to reach a wider consumer base instead of passing the cost to its customers. By doing that, Quasar Computer avoided the risk of jeopardizing its consumers’ demands. As a result, Neutron’s price was lowered to $2,200, production level of 9.4 million units, and profit increased to $2.21 billion.

As Quasar Computer’s patent expired, potential competitors entered the market. Orion entered and changed the market to oligopoly. This market consisted of a small number of firms, usually fewer than ten. In our simulation, this market had 2 suppliers. In this environment, price was sensitive since products were close substitutes. Quasar Computer’s goal in this environment was to retain its market share of 50 %, and at the same time attempted to target Orion’s customers. In order for Quasar Computer to maximize its own profit while keeping market stability, it needed to set the price at $1,950. At this price, Quasar not only optimized its profit, it allowed Orion to make profit as well, and that created equilibrium in the market. In the long run, for both firms to sustain their existence in this market, they must operate interdependent of each other. In order for both firms to maximize their own profits, one needs to understand