Economics for Business Assignment Sample

1. Market Structures

1.1 Definition of market

In the field of economics, a market can be explained as a place where the exchange of goods and services takes place. According to Banzhaf (2017), this is where the buyer comes in direct contact with the sellers with the only objective of buying goods to satiate their needs.

However, it should also be noted that even if the sellers and buyers aren’t in direct contact, and the buying and selling take place through any mediating agents or even virtual mediums, it is considered a market even then.

The definition of the market has evolved as the behavior of buying and selling has changed. Today, in this modern industrialized system the market is just not a place rather it also includes all the “geographical” areas where the sellers are competing with each other for getting customers attracted to their products.

As per the great economist Cournot, a market is not just any particular place of exchange of goods, but any region that carries out the exchange of goods and services. However, on this note, it should also be considered that the market comprises several types, each having its distinct characteristics.

1.2 Nature and attributes of the different market structures present

Several types of markets dominate the economy, each having its own distinct set of attributes and this variation generally occurs based upon the industry in which they belong.

The five major market types are perfect competition, monopoly, oligopoly, monopolistic, and monopsony (McFadden et al. 2019).http://Economics for Business Assignment Sample Each of these markets has its instinct set of attributes which sets it aside from the others.

In the case of perfect competition, there exists an infinite number of buyers and sellers in the market which thereby causes the market to be highly competitive. The prices being close to each other gives the buyers the option of defecting to another buyer selling the same kind of good at a lower price.

The absence of competition makes it easier for the seller to charge any kind of price that they want. In a monopoly market, there lies only a single producer who dominates the market and acts as a price maker. As for monopolistic competition there exist numerous competitors in the market each selling a product that is slightly differentiated from the other.

The oligopoly market is similar to that of monopoly in many ways, however, the major difference is that it has quite a few producers instead of just one. Hence, there exists some form of competition in the market. As per the view of Sokolova et al. (2021), monopsony is a market that is “differentiated” based on the number of buyers present in the market. Thus, it can be seen that each market has its own distinct set of traits.

2. Variation in Assumptions

2.1 Perfect Competition

This is often considered to be an “ideal” market structure where the buyers and sellers have perfect information regarding the market, with no transaction costs present.

Also, the goods sold in the market are mostly homogenous and hence, gives the consumers the option of selecting a producer which will help them gain the maximum benefit (Munoz et al. 2018). http://Economics for Business Assignment SampleIt operates on certain assumptions that have been outlined below.

• A large number of producers and consumers are present in the market each of them selling a homogenous good
• The presence of perfect information in the market helps in ensuring that no buyer is cheated, and rational decision-making takes place
• The ability to freely enter and exit the market as per the preference of the sellers
• Profit maximization is the main motive based on which all the firms present in the market are operating
• There exist no selling costs for the producers in the market.

As evident from the given assumption, this matter is different from the other types based on the behavior of the buyers and sellers in the market.

Comparing it with a monopoly market where there exists only a single producer, it can be stated that perfectly competitive markets are varied and can be found in the fields of agriculture, online retail, and even foreign exchanges.

2.2 Monopoly

In the case of a Monopoly market, there exists only a single producer having control over the entire market. The seller here sells a product that is not sold by any other person in the market.

Hence, this gives the seller power to decide on the quantity of the product it sells and also charge any kind of price on it. The major assumptions of monopoly have been given below.

• There exist only a single form in the market that sells all the output
• The product being sold is unique and different than what is offered by the other sellers in the economy
• No close substitutes are available in this market
• There are barriers present regarding the entry of a firm or even the exit of a firm in the market
• Information in this market remains mostly unavailable as it may threaten the uniqueness of the product being sold.

The existence of a pure monopoly is very rare, however, there are “instances” of producers who own a major portion of the market and hence are termed a monopoly (Simshauser, 2017).http://Economics for Business Assignment Sample Also, the entry of even a single extra firm may change the market description of being a monopoly.

2.3 Monopolistic Competition

Often termed as imperfect competition, in this market, there are many producers present each selling a good that is differentiated from the other. A monopolistic market is exactly the opposite of a perfectly competitive market, where a huge number of firms exist in the market.

The market often shows characteristics of a pure monopoly, and hence is a price maker in the market. According to Lordkipanidze (2019), the control these firms have on the economy makes it possible for the firms to set the price of the goods and control the supply of the product in the market. The market has the following assumptions which have been given below.

• There are a large number of firms present in the market each having an “insignificant” small share in the entire market
• As each of the firms sells a slightly differentiated product and hence there are unlikely to affect the rivals in the market, thereby having independence in the economy
• There exists freedom of entry in the market, provided each of the new entrants sells a product that is different from its rivals
• The products should be differentiated from each other which is one of the most important assumptions in the market.

Monopolistic competitive markets are quite common, each having its distinct characteristics. Examples include petrol stations, restaurants, hairdressers to name a few of them.

The distinct goods and services that are offered by these firms make it easier for each of the firms in the market to have its distinct share.

2.4 Oligopoly

In the oligopoly market structure, the markets are mostly dominated by a large number of suppliers; none of the firms present to make it possible from having the other firm had a significant influence. This kind of market structure generally arises when there is a concentration of a large number of firms having most of the sales in the given industry (Adams et al. 2019).http://Economics for Business Assignment Sample

The domination by a few firms in the industry, each selling products that are either homogeneous or differentiated based on the supply in the industry. Also, another very important characteristic is that each seller can influence the other, as there exist only a few sellers in the market. The assumptions of the market have been given below.

• There exist more than two firms in the market
• The products produced in the market are mostly homogenous
• The outputs produced by the firm are perfect substitutes in nature
• The goods produced by the firms in the market are at a constant marginal cost
• The prices Pa and Pb are chosen simultaneously by the firms.

Hence, it can be stated that the oligopoly market is also competitive, selling homogenous products having a significant effect on each firm on the market. Thus, it can be stated that the assumptions taken in this market are distinctly different from each other.

3. Game Theory

3.1 Analysis of the Concepts in Game theory

Game theory can be defined as a framework, which is social and used to deal with situations between two payers. It is a strategic game where a player makes an informed decision regarding what it will follow to achieve maximum benefits (Newton, 2018). http://Economics for Business Assignment SampleThe theory presents an interactive situation between two key players who have a rational mindset.

In this theory, the decision taken by one player is contingent on the strategy that will be taken by the other player in the game. The game helps in identifying the preferences of the players, along with all the strategies that are available based upon the given preferences. Lastly, it also helps in explaining how each of the strategies can affect the outcome of the game.

The dominant strategy is considered as a situation where the strategy chosen by a single player becomes accepted irrespective of the decision changes by the other players. Here, the dominant strategy helps the player take up the strategy that will yield the maximum benefits. As opined by Garcia-Meza et al. (2018), equilibrium in this game can only be reached when both the players have decided on their strategies and a favorable outcome has been reached.

3.2 Application of Game theory in Oligopolistic markets

In an oligopoly market framework, it should be noted that the firms are not affected by the decision they make regarding a product or service but by the decisions being made by their competing firms. In such a scenario, the best way to rationalize the situation and choose a strategy that works best for both the firms is theory plays a vital role in resolving this situation.

As opined by Sun et al. (2017), the usage of this model helps the firms to choose a strategy in their decision-making process that will help in maximizing their profits without affecting the other in the market. Say, for example, the model can be used to determine why oligopolies face trouble in maintaining the “collusive” arrangements when it comes to generating “monopoly” profits in the economy. In this given situation, it is evident that each firm will have a strong “incentive” to cheat and enhance its market share.

In such a situation it can be seen that the firms will be better off if they cooperate, however, the strong incentive effect makes it difficult for them to enter into the “collusive” agreement. The use of game theory thereby will help the firms underline the strategy which will help in removing the defect and choose the best strategy rationally. The dominant strategy that emerges from the situation is what the firm will implement to cement its place in the market.

3.3 Reason for selecting the dominant strategy

As it has been seen that collusive arrangements are unstable that needs to be carefully handled. The dominant strategy, in this case, will be adopting a product and modifying it with unique characteristics that will make it difficult for the opposing forms to compete. Hence, the dominant strategy in this case when considering collusive arrangements will be to modify the existing product.

The addition of more specifications to it makes it better than what the competitor is offering. Thus, selecting the dominant strategy will help the firm gain an edge over its competitors and sell a product that even though is homogeneous but has slightly better offerings than the other products (Sedakov, 2018).http://Economics for Business Assignment Sample

Therefore the game theory plays a major role in helping firms make rational decisions regarding their products and find a dominant strategy that will help in managing competition in the market. It should also be noted that the selection of the dominant strategy gives rise to a Nash equilibrium where none of the firms can be better off by changing its strategy.

In the given case, the firm may think that adding specifications will increase the chances of its products being sold more, however, it also adds to its cost. The product being sold at the same price even though there has been an increase in cost will ultimately not work in favor of the firm. Thus, when both the firms could have worked together and generated profits, here none of the firms will be better off.

References

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