Managerial Decisions in Differing Market Structures

In making different managerial decisions, organizations usually consider varied factors, which fit well to the current position of the organization and do not jeopardize its position in the future. Among the most important factors that an organization may consider is the market structure in which it operates. However, the decisions that managers are capable of taking may have different effects in different market structures. The principle aim of most managerial decisions is to maximize the profits of the company in the short term and in the long term. The stability of the organizations is mainly due to decisions that guarantee the profitability of the company in the future. Managers, therefore, make decisions that may seem a burden and reduce the current profit of the company to myopic minds; however, the decisions may ultimately ensure the future profitability and competitiveness of the company.

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There are three main market structures in which virtually all organizations operate. These include competitive market, monopolistically competitive market, and oligopolistic market. A competitive market is a market in which no major company has a sizeable share of the market to command market control. This type of market structure is mainly characterized by many firms that sell similar products to a large number of customers who have fairly good information on the prices of the goods and the factors of production (Bridge & Dodds, 1975). The monopolistic competitive market on the other hand is characterized by companies that produce products whose quality cannot be matched by any other company in the market. These companies are capable of setting their own prices (Hirshey, 2008). An example of a monopolistic competitive market is the market for books where the publishers are able to set their own prices and the quality of the books is unique to the author. An oligopolistic market is characterized by a market, which is dominated by a few firms that are relatively large. In such a market industry, two to eight firms may control 75 % or more of the market share. The strategic decisions of one firm in an oligopolistic market usually affect the decisions of the other companies in the industry (Webster, 2003).

Managerial decisions in a competitive market

Organizations in a competitive market are price takers rather than price setters. This means that the organizations have no control over the prices of the products; the prices are mainly set by the forces of demand and supply (Maurice & Thomas, 2008). Managers, therefore, consider the above factors in making decisions that would lead to profit maximization of the company. Some of the decisions may be making the company lose money but may be beneficial in the long run. This paper will consider different decisions aimed at maximizing the profit of the company.

Profit maximization is the short term

During the short-run period, the organizations usually have fixed costs which they must be able to cater for regardless of whether the company is generating income or not. Among the major decisions that the managers must make is whether to continue producing or to shut down. Generally, shutting down is a situation in which the company produces zero output but must still be able to cater to its overhead costs (Maurice & Thomas, 2008). In a competitive market, managers must ensure that they produce optimum quantities, which will ensure that the products gain maximum revenue for the company. This may sometimes mean that the marginal profit per unit of the product is lower than if the company produced lower quantities of the product. However, the organization benefits due to the cumulative marginal income that is much higher than if the company produced low quantities of the same product (Maurice & Thomas, 2003). The company can also decide to produce at a loss in the short term as long as it is producing enough output to cater for the fixed costs which it incurs (Maurice & Thomas, 2003). The output produced by an organization in a competitive market for profit maximization is usually far much higher than the output produced by organizations that are either in an oligopolistic or monopolistic market (Toche, 2010)

Profit maximization in the long term

A competitive market is prone to the entry of new companies that may be attracted by the handsome profits, which companies in the industry are making. As more companies enter the market, the returns of the companies fall due to the increase in production or supply. This may continue until a situation when the returns in the industry are almost equal to other markets that the entrant companies could venture into. However, when the market is saturated, the profits of the companies in the industry fall, making some of the companies exit the industry (Maurice & Thomas, 2003). Therefore, to maximize profits in the long run, managers should ensure that they make decisions to reduce their fixed costs and achieve maximum productivity with the available resources.

Managerial decisions in an oligopolistic competitive market

An oligopolistic market is characterized by few companies that control a sizeable market. One important characteristic of an oligopolistic market structure is the tendency of the decisions of one company to affect the decisions of the other companies in the industry. If the companies do not respond to the changes made by the other companies in the industry, they risk losing a sizeable share of the market (Webster, 2003). Due to the relatively large size of the oligopolistic companies, they may sometimes be tempted to collude with each other to influence the price or competition in the industry. These organizations may collude to form cartels, which will determine the number of units that each member in the market should produce to maximize their profits, an example of such cartels being OPEC, which controls the amount of oil that each member country should produce. However, this practice is illegal in most countries.

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Profit maximization in the short term

To ensure profit maximization in the short term, most of the oligopolistic competitive firms would reduce the price of their products to acquire a larger market share. A reduction in the price would lead to a significant increase in the market share of the company and in return, lead to increased profitability in the short term. However, that may only happen if other firms in the industry do not counter the move by also lowering their prices. This is mainly due to fact that the elasticity of demand is affected by the changes in price (Mankiw, 2008). This differs from the competitive market in which price changes would not affect the demand of certain organizations, since no individual organization commands a sizeable market share to have any significant effect.

Profit maximization in the long term

In an oligopolistic market, profit maximization in the long term is mainly achieved through cooperation with other players in the market. This would be beneficial to the company rather than the other members in the market or cartel and gain in the short term but lose in the long term (Toche, 2010). The cooperation of all the members ensures that they sell a few units of the products at a high price and thus yield high profits. However, if the companies fail to co-operate, they may sell a large number of units that would still enable them to get lower profits than if they co-operate. Thus, cooperation is beneficial to all the members of the oligopoly market (Mankiw, 2008).

Managerial decisions in a monopolistically competitive market

A monopolistically competitive market is characterized by companies which can fix the price of the products that they sell i.e. the companies are price setters and not price takers. These companies may sometimes increase the prices of their products and continue to operate profitably even though the sales of the products may fall (Maurice & Thomas 2008). Most of the companies in a monopolistic competitive market produce unique products whose qualities cannot be matched by the other companies in the industry. In addition, the companies are able to differentiate their products from the products offered by competitors (Hirschey, 2008). Indeed, in a monopolistic competitive market, there are usually many small companies.

Profit maximization in the short term

To help maximize its profits in the short term, a company in a monopolistic competitive market may choose to produce units of its products in which the marginal revenue is equal to the marginal costs. At this quantity, the company would be able to sells it products at a price that would ensure that it gets maximum income (Mankiw, 2008). Thus, a company in a monopolistically competitive market is able to set the quantity of products that would enable it maximize its profit, unlike in the competitive market where companies attempt to produce large quantities of the products to maximize its profits in the short term. If an organization in a competitive monopolistic market produces large quantities of its products, it would not be able to maximize its profits since the marginal income from the products would reduce.

Profit maximization in the long term

In the long run, entry of new businesses into the market may force the company to lower its profit maximization price and the quantity since the competitor may capture a sizeable market share. Therefore, the company has the option of either choosing to produce high quantity of its products at a lower price so as maximize its profit or it may choose to sell a lower quantity of its products at a higher price. The decisions that the company may take will usually be dependent on the potential loss in the market share that will be brought about by the lower output of the company and the threat that may be posed by the competitor (Hirschey, 2008). The above differs from the competitive market or oligopolistic market such that in the competitive markets, the company does not have the choice of setting its own output. The company simply tries to reduce its fixed operational costs or losses to maximize profits in the long term.

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References

Bridge, J. & Dodds, J. C. (1975). Managerial decision-making. London: Taylor & Francis.

Hirschey, M. (2008). Managerial economics. OH: Cengage Learning.

Mankiw, N. G. (2008). Principles of Economics. OH: Cengage Learning.

Maurice, S., & Thomas, C. (2008). Managerial economics w/ CD. NY: McGraw-Hill. (Attached material).

Toche, P (2010). Oligopoly. Hong Kong: City University of Hong Kong. Web.

Webster, T. J. (2003). Managerial economics: theory and practice. Oxford: Emerald Group Publishing.

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