Market Model Patterns of Change

Market Model Patterns of Change

In the past, some industries in the US were dominated by monopolies (one big supplier); this was due to the “barriers to entry at that time” into that particular industry such as government regulations as well as high costs of setting up business investments (James E. Wells, Jr. 2004:09).The government however moved to demolish monopoly and encourage competition so as to protect the US consumers. Companies had to follow rules and regulations established under the Sherman's Hammer Sherman Antitrust Act that was passed in the year 1890 that banned trusts as well as monopolies. United States Monopolistic Market condition of the oil industry in the early 90s'

Monopoly is an economic market condition where one producer/seller dominated the market.

High prices were charged since there was no competition

High barriers to entry that was due to technology, patents, distribution overheads, government regulation or capital-intensive nature of the industry.

Chosen company: Standard oil (US).

The US oil industry

The oil industry in the US dated back to the early 19th century. Oil was first discovered in Pennsylvania in 1859. Standard Oil was amongst the first companies to be established during the first discoveries. It was formed in 1870 and was the only dominating company that produced oil, refined, transported and marketed. It remained as the largest oil refiner in the United States for some years until its monopolistic dominance was broken up by the Supreme Court in the year 1911 (John H, 1986:103). Due to public outcry the court ruled that the company be dissolved under the Sherman Antitrust Act. It was then split into 34 companies. The major ones were Jersey Standard which then became Exxon and Socony which then became Mobil. Over the decades, the US oil industry has been characterized by new entries (local and foreign), mergers, acquisitions, break ups as well as split-offs between companies (James E. Wells, Jr. 2004).

Now there are now multiple oil companies (local and foreign) in the United States which changed the market structure from a monopolistic type to perfect competition (James E. Wells, Jr. 2004).

United States current perfect competitive market in the oil industry

Perfect competition is a market structure where there are many buyers and sellers.

Products in the Market are similar.

Profits earned are normal.

There are no barriers to entry or exit.

There is market knowledge of price and products in the market.

Short-run behavior of a company in a perfect competitive market

Because of low demand for the products in the short-run, new companies must decide by how much they will produce. Low demand forces the company to price its products below the market price. At first, fixed costs are usually high and firms use the shut-down rule (if revenue falls below the total costs). It takes long to break even because prices are lowered as compared to the prices of competitors. Market share is obviously low at first. Costs of production are usually high due to set up costs, staffing, conducting research as well as marketing the new products ...