The Market Structures Paper
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The Market Structures Paper
In market economic, market systems can be categorized in terms of the number of companies and businesses in a given industry. These types of market structures determine the competition within the market. There are four major market structures, namely perfect competition, monopolistic competition, oligopoly, and monopoly. Business owners should understand the types of market systems to operate in because they influence pricing and production decisions. This paper will describe these types of market structures and explain where Amazon falls and how the competition influences it.
Perfect Competition
Perfect competition is a market system marked by many buyers and sellers. In the classical theory, the sellers and buyers are infinite in number and none of them is greater than the other (Gitman et al., 2018). As such, none is influential enough to alter prices in the market. Both buyers and sellers have alternatives to opt for in case of price alteration. Hence, all firms are price takers and oblige to coexist.
Monopolistic Competition
In monopolistic competition, there are many buyers and sellers just like the case of perfect competition. However, these sellers do not sell similar products, a common scenario in the real-world market. The products are slightly differentiated from the other, giving sellers the opportunity to charge different prices and still remain competitive (Gitman et al., 2018). The variations come in form of style, quality, location, convenience, and brand name, like in the music industry.
Oligopoly
Oligopoly is a market structure with few sellers. Most of the products required by consumers are sold by one seller. New entrants are few in this form of market structure because it is expensive to start (Gitman et al., 2018). Though oligopolists cannot influence prices as individuals, they can collude with one another supported by favorable government policies to set prices as in the case of monopoly. Examples are large-scale enterprises like automobile companies, TV stations, and airlines.
Monopoly
In a monopoly, there is only one seller in the market, hence no competition. The market can be a geographical area, such as a regional area or a city, and must not necessarily be an entire country (Gitman et al., 2018). With no competition or substitutes, this seller influences the market prices because they alter the prices a will. Luckily, they are few in the US because the government limits them.
Amazon’s Market Structure
Amazon is an oligopoly. This is because it is a dominant player in its products with only a few competitors with a similar influence and new entrants. By revenue, Amazon is the largest e-commerce company in the US (Segal, 2021). Despite being the largest online retailer in the world, it is rapidly diversifying to other areas, such as physical retail stores, web services, and subscription services. In retail stores, notable rivals include Target, Best Buy, Walmart, and Costco. In subscription services, Amazon’s competitors include Apple, Netflix, and Google (Segal, 2021). As for web services, Amazon competes with Oracle, Microsoft, IBM, and many others. Amazon dominates online stores though it competes with several companies such as LightInTheBox Holding Co. (LITB), Vipshop Holdings Ltd. (VIPS), Overstock.com (OSTK), JD.com (JD), Etsy (ETSY), and Wayfair Inc. (W) (Segal, 2021). Since Amazon provides a great variety of products with few competitors and dominates its niche, it suits the requirements of an oligopoly.
Competitive Pressures as a High Barriers to Entry
New entrants find it hard to compete with Amazon because of factors, such as high economies of scale and the high cost of developing a competitive brand. To compete with Amazon’s brand, new entrants will require billions of dollars and many years of operation and development (Greenspan, 2019). Additionally, being a big company, Amazon enjoys economies of scale that new entrants cannot easily achieve to compete with it. Therefore, new entrants are not big threats to Amazon’s performance in the online retail industry environment. These two factors neutralize the advantages of low switching costs or little to no negative ramifications of shifting to new providers confers to new entrants in the industry (Greenspan, 2019).
Influence of a High Barriers to Entry to Amazon’s Long-Run Profitability
Barriers to entry into the online retail markets favor Amazon. With no new entrants, Amazon has few competitors of its caliber (Greenspan, 2019). As such, it will maintain its dominance, bargaining power with suppliers, and pricing influence. Amazon will also maintain and grow its market share, customer loyalty, and grow the company. Currently, a strong entry into the online retail market is skewed to a high investment of time and money (Greenspan, 2019). These two variables favor Amazon and other established competitors like Walmart and discredit new entrants.
Price Elasticity of Demand and Its Effect on Amazon’s Pricing Decision
Prices elasticity is used in economic when evaluating the responsiveness of the quality of goods and services demanded following a change of their prices without changing any other factor. Variables such as who pays, brand loyalty, the breadth of defining the good or service, duration, how much they are needed, the percentage representing the increase over consumer’s income, and the availability of substitute products (Dans, 2018). Price elasticity has considerable impacts in an oligopoly because substitutes are available even though they are few (Dans, 2018). Increasing prices may not lower the demand for the services or goods offered but can make customers transfer to competitors, especially in online retail companies, where there are low switching costs with little to no negative ramifications.
With regards to amazon, price alteration has little impact on demand. The is because Amazon practically lacks a comparable product, because of its breadth of definition (Dans, 2018). Customers are attracted by its perceived huge products ranges and services, such as the back catalog of books or music and the convenience of unprecedented logistics. It has developed a brand that cannot be easily shaken by price alteration (Dans, 2018). For instance, in 2018, the price of Amazon prime was increased from 19.95 to 36 Euros and $99 to $119 in the US. The impact was a rapid virtual growth in its all market and a 100% renewal rate (Dans, 2018). This is attributed to perceived increased convenience. It shows that the price change had no impact on demand.
Amazon is an oligopoly because of the few competitors around it. However, it enjoys some dominance in the online retail industry to the extent of being a monopoly. It is not much threatened by new entrants or affected by the price elasticity of demand because most variables are skewed to its favor. However, Amazon must not be complacent because the competition is still stiff and must remain vigilant to survive it.
References
Dans, E. (2018). Why price elasticity doesn’t apply to Amazon. Medium. https://medium.com/enrique-dans/why-price-elasticity-doesnt-apply-to-amazon-d3a69d4efd17
Greenspan, R. (2019). Amazon.com Inc. Five Forces Analysis & Recommendations (Porter’s Model). Panmore Institute. http://panmore.com/amazon-com-inc-five-forces-analysis-recommendations-porters-model
Gitman, L. J., McDaniel, C., Shah, A. J., Reece, M., Koffel, L., Talsma, B., Hyatt, J. C. (2018). Introduction to business. OpenStax College.
Segal, T. (2021). Who Are Amazon’s (AMZN) Main Competitors? Investopedia. https://www.investopedia.com/ask/answers/120314/who-are-amazons-amzn-main-competitors.asp