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Introduction

A firm or a group of firms based on
interconnected characteristics where
buyers and sellers come to interact for the exchange of goods and services is
called market structure. The major characteristics that define market structure
are number of firms, ease of market entry and exit, and product differentiation
degree (Wilkinson, 2005).
Market structure allows selling environment to buyers where a firm or a group
of firms are involved on it. Perfect
competition, monopolistic
competition, oligopoly and monopoly and are the main four market structures
prevailing in the world. These market structures are distinct from one another
on several grounds. The market structure hugely influences firms as well as
consumers’ behaviour in the market. The firms at any market structures aims to
maximize their profit in short run and long run by selling either identical or
differentiated product or both. But
product differentiation is not possible on every market structures (Hubbard, Garnett,
Lewis & O’Brien, 2016).
The analysis of once-off expenditure to guarantee firm’s ability to maximize
their economic profit in the future which is discussed as:

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Analysis

Once-off
expenditure is something which is carried out once and cannot be altered
immediately. Such expenditure on product differentiation is crucial because it
incurs expenses to make product distinct among competitors. Product
differentiation could physical product differentiation, marketing
differentiation, human capital differentiation and differentiation through
distribution. Successful product differentiation helps to induce
competitive advantage and improves the firms’ ability to maximize economic
profit in the future. While an economic profit is the profit generated
over opportunity cost.

 

 

 

 

 

Perfect Competition

Perfect
competition is that market structure which is comprised of numerous buyers and
sellers. The nature of product is identical which is sold by small as well as
independent sellers in the market. The price of goods and services in perfect
competition is not under the control of seller or buyer. Market forces such as
demand and supply determine the market equilibrium price which is accepted by
all existing firms and buyers.

 

Will product
differentiation guarantee the firm’s ability to maximise economic profit in
future?

The
nature of product does not allow it to differentiate product. For example the
sellers of salt, sugar, rice, market of crops, cereal, fruit, Sydney fish etc
cannot differentiate its product. It cannot make expenditure to differentiate
its product as the firms are price takers. Though firms can maximize their
economic profit by increasing their output levels upto a certain quantity in
which the marginal cost is equal to marginal revenue.

 

Monopolistic
competition 

Monopolistic
competition is set up by large number of firms who compete with each other
offering differentiated product. It resembles some characteristics of perfect
competition and monopoly. On one hand, it is similar to the perfect competition
because there are numerous firms in competition who can enter and exit the
industry due to low relative cost. In other hand, it is similar to monopoly
because the sellers have some control over price and output. A firm can create
mini-monopoly which means it can be the producer of specific product. Due to
existence of large number of firms, there is small market share division among
each firm and therefore cannot influence the price of its product. The firms
get less affected from the activities of competitor and can make move in order
to differentiate product independently, based on assumption of independence. In
such market, what its rivals choose to do will not be influenced by what it
does (Garratt, 2013).

 

How the product can be
differentiated?

The way monopolistic market is different from
other market structure is that the firms produce differentiated product.
Product differentiation makes the particular product more appealing and
contrasting in terms of price, quality, benefits, marketing services etc than
that of competitors and a source of competitive advantage over others.  For example quality of brands such as Adidas,
Puma, Nike, etc may different in terms of design, style, reliability etc. The
other features may include customization, performance,
durability, reliability, reparability, etc.
  The basic examples are petrol station,
restaurant business, hairdresser and builder, producers of audio and video
equipment, computers and sporting goods, etc

 

How
differentiated products guarantee the firm’s ability to maximise economic
profit in future?

There
is less substitution effects due to lack of close substitute for the product.
This results in inelastic demand and the curve slopes downward. .
Product differentiation allows seller to set up prices
higher than marginal costs. More firms are encouraged to enter because of
supernormal profits but the firms earn normal profits in the long run. Firm may
use aggressive advertising policy to reflect their product different than its
rival. It may neglect the effect of its own prices over the prices of other firms. The firm
produces and sells the quantity at highest possible price which happens if MR equals MC. It can make an economic profit if the price is greater than
average total cost.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Source: http://www.economicshelp.org/

On
the other hand, the expenditures made on product differentiation may not
eliminate other goods as substitutes. If cross elasticities of demand between
goods in a monopolistic market are high, there will not be higher price going
to be charged by such differentiation that may result on losses as average
total costs. There may
incur an economic loss for a firm in the long run.

 

For Instance

If
apple is going to launch iphone 7, it should differentiate the product with
additional features and that should be distinct than other cell phones in the
market. The style, customization, quality, durability etc make iphone 7
distinct for which apple has to make expenses on innovation and technology,
research etc. There may also incur advertising expense as well. So earn
economic profit, there should be continuous product development. It helps to
achieve competitive advantage and before competitors imitate it, so it should
look for further innovation.

 

 

 

Oligopoly       

Oligopoly is that common market structure where few large
firms compete with one another by selling identical product or differentiated
product. Though there are few firms but they cover large market share. The
price and output set by one firm affect rest of other firms that is why there
is interdependence of firms (Sloman & Sutcliffe, 1998). There is obvious less barriers to
entry than monopoly

 

Will product
differentiation guarantee the firm’s ability to maximise economic profit in
future?

The oligopoly can sell either
differentiated or identical product, so there may chance of profit but not
generally practiced. The equilibrium price is determined by the point where
marginal revenue equals to marginal cost and at that point firm earns supernormal
profit under collusive oligopoly. Examples are
automobiles manufacturers, banking, supermarkets etc.

 

Monopoly

Monopoly is that market structure which is
characterized by single seller of a product and a number of buyers. The reason
why monopoly appears is because of restriction caused by entry barriers that
result in no competition. There is no close substitute for the product that the
seller is going to sell in the market. The monopolist
has control over the price and set price of product.

 

Will product
differentiation guarantee the firm’s ability to maximise economic profit in
future?

Under
monopoly, the nature of product is unique so there is no possibility of product
differentiation. There is supernormal profit in short run as well as long run
that a firm can enjoy under monopoly market. It is not applicable for all as
few firms may face normal profit and bear losses too. The average cost of
production decrease with the increase in scale of production. The elasticity of
demand for a monopolist’s product is zero because a monopolist has full control
on the supply of a product. Examples are Sydney Water, Luxottica, Monsanto, Nepal electricity authority, etc.

 

Conclusion

The overall discussion made
above draws the fact that a firm can gain economic profit with the help of
product differentiation. Product
differentiation which could physical product differentiation, marketing
differentiation, human capital differentiation and differentiation through
distribution, etc can maximize economic profit. Product differentiation
makes the particular product more appealing and contrasting in terms of price,
quality, benefits, marketing services etc than that of competitors and a source
of competitive advantage over others. The
once-off may not be sufficient as there is always competition in the market and
it should make expenses for innovation, change and advertising.

 

 

 

 

 

 

 

 

 

 

 

 

 

References

Garratt, J. S. , (2013). Economics for Business. United Kingdom:
Pearson Publication.

Camic, C., Gorski, P. S., & Trubek, D. M.,
(2005). Max Weber’s economy and society: A       critical companion. Stanford, CA: Stanford
University Press.

Wilkinson, N. , (2005). Manegerial Economics: A problem solving
approach. England: Cambridge University Press.

McTaggart, D., Findlay, & C., Parkin
M., (2013). Economics (7th
ed.), Australia: Pearson Australia

Hubbard, R.G., Garnett, A.M., Lewis,P., &
O’Brien, A.N., ( 2016).Essentials of
Economics (3rd ed.). Australia: Pearson Australia

Sloman,
J., & Sutcliffe, M., (1998). Ecomonic
for Business. Pearson Education Limited : England.

Timms, H.
(1929). Economics help. Retrieved September 5, 2016, from
http://www.economicshelp.org/

 

 

 

 

 

 

 

 

 

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