Market Structures

Selected as a real-world company, Amazon, the world’s largest online retailer, has revolutionized the way people shop and access goods and services. Despite its dominance, Amazon faces stiff competition from other online retailers. Distinguished in this essay are the four market structures: perfect and monopolistic competition, oligopoly, and monopoly, to determine which best describes Amazon’s market structure. The presence or absence of competition in Amazon’s highly regulated market is equivalently explored. The essay equally assesses the potential impact of strong barriers to entry on Amazon’s long-term profitability. Lastly, the price elasticity of demand in Amazon’s market structure and how it influences the company’s pricing choice are discussed. Objectively, Amazon operates in an oligopolistic market structure with high barriers to entry that provide advantages to established firms, leading to likely robust long-term profitability, and the company’s pricing decisions are influenced by a relatively low price elasticity of demand in its market. 

Four Market Structures

The major market structures include perfect competition, monopolistic competition, oligopoly, and monopoly. In a market with perfect competition, several small firms produce similar goods without market power to set pricing. There are no barriers to entry or exit from the market, and consumers have complete knowledge of the products (Mankiw, 2021). In a market with monopolistic competition, many small firms that make marginally distinctive goods, which are similar but closely differentiated, have some market influence over pricing (Mankiw, 2021). Customers lack perfect knowledge about the products and the market, and minimal barriers exist to entering or leaving the market. In an oligopolistic market, a few dominant, powerful companies have the significant market power to affect pricing (Mankiw, 2021). There are significant hurdles to entering and exiting the market, and consumers have incomplete knowledge about the product. Mankiw (2021) indicates that in a monopoly market structure, only one firm produces a special product, and it has total control over pricing. There are significant restrictions to entering and exiting the market, and consumers have limited knowledge about the product.

Amazon’s Market Structure

Amazon operates in an oligopolistic market structure in the e-commerce industry. Only a few reputable companies or participants, such as Amazon, eBay, and Alibaba, dominate the market and have substantial market power to affect pricing (Varian, 2020). Being an oligopoly, there are significant obstacles to entry and exit from the market, and consumers have incomplete knowledge about the products sold by these firms.

To justify Amazon being an oligopoly, Amazon’s dominant market share is a major contributor to the e-commerce sector’s oligopolistic structure. From its inception, the firm has built a solid reputation for its prompt deliveries, dependable customer service, and affordable costs (Etumnu, 2022). Due largely to such an image, Amazon has grown to become one of the most successful companies globally. Amazon’s sector dominance allows it to set pricing and ensure it can continue making a profit.

Competitive Pressures and Barriers to Entry

Amazon’s key competitive pressure is the need to constantly innovate and improve its services to keep up with changing customer demands and price competition. Competition in the e-commerce sector is fierce, but new entrants face steep hurdles. Amazon is under intense pressure from its competitors to develop and enhance its services consistently to meet the ever-evolving needs of its customers. Amazon has put many resources into technology and logistics to provide expedited shipping options like same-day and two-day delivery to its consumers (Etumnu, 2022). However, its rivals as well invest in comparable technologies, which might slice Amazon’s market share unless it is vigilant. 

Correspondingly, Amazon faces pressure from its competitors through lower prices from rivals. Although Amazon has made a name for itself via its low prices, rivals like Walmart and Alibaba have been able to undercut it by taking advantage of economies of scale and better supply chain management (Kyle, 2019). So, Amazon has to regularly assess its price policy to guarantee it is still competitive while maximizing profits.

The implication of Entry Barriers to Amazon’s Long-Run Profitability

The high barriers to entry in the e-commerce sector heavily influence Amazon’s long-term profitability. When a company tries to compete with an industry leader like Amazon, they confront significant challenges. Economies of scale, brand recognition, and access to distribution networks are just a few obstacles that make it hard for new entrants to break into the booming e-commerce sector. 

Economies of scale are a major benefit for well-established companies like Amazon. As a business expands, an edge over rivals may be gained via decreased manufacturing costs per unit. For instance, Amazon’s ability to process orders and deliver items more quickly than its rivals is largely due to the company’s massive network of distribution facilities (Etumnu, 2022). Its effectiveness results in lower prices and quicker turnaround times, which are challenging for new entrants to match. Amazon’s competitive advantage likewise stems from the company’s well-known brand. Having a recognizable and reliable name as Amazon marvels for the company’s ability to win new consumers and keep existing ones. There is a higher barrier to entry for new businesses since it takes time and money to build a great brand. Amazon’s name recognition and stellar reputation make it more probable that customers will select the firm over a newer one offering the same or comparable items and services (Varian, 2020). Another major challenge for new entrants in the e-commerce sector is finding reliable distribution channels. Amazon’s enormous supplier, distributor, and fulfillment center network facilitates the company’s supply chain management and expedited product delivery (Etumnu, 2022). Fresh entrants may be disadvantaged since they may have difficulty building networks on par with the established players. These advantages arising from high barriers to entry imply that Amazon is likely to maintain its dominant position and market share in the e-commerce industry while limiting the entry of new players; thus, the company is likely to maintain its profitability in the long run.

Amazon’s Price Elasticity

In Amazon’s oligopolistic market structure, the price elasticity of demand is relatively elastic, meaning that a small price change can result in a significant change in the quantity demanded. Kyle (2019) argues that due to the concentration of market power in the hands of a limited number of enterprises, the price elasticity of demand in an oligopoly is lower than in a completely competitive market. Businesses use strategic pricing in an oligopoly, and the degree of product differentiation affects the price elasticity of demand (Mankiw, 2021). Such elasticity impacts Amazon’s pricing choice, and the corporation commonly utilizes dynamic pricing strategies to modify its prices in real-time depending on demand and supply. The strategy allows Amazon to retain profitability and keep up with the competition. Amazon, for instance, has been known to raise prices during some peak demand periods around the holidays and Black Friday (Etumnu, 2022). On the other hand, the firm may reduce prices during reduced demand to boost sales. Amazon has a significant competitive edge due to the fast and precise way it can change pricing. The firm’s cutting-edge algorithms and data analytics tools may collect and analyze massive amounts of information on customers’ actions, market tendencies, and rivals’ prices (Etumnu, 2022). Based on the information, Amazon can make well-informed price selections and instantly adjust its prices, increasing its profits.

Conclusion

Conclusively, Amazon operates in an oligopolistic market structure with high barriers to entry that provide advantages to established firms, leading to likely robust long-term profitability, and the company’s pricing decisions are influenced by a relatively low price elasticity of demand in its market. Amazon’s oligopolistic market structure results from its dominant position in the e-commerce industry. The company’s dominant position in the market permits it to remain profitable despite intense competition. Nonetheless, established corporations like Amazon have an enormous advantage due to the high hurdles to entry for new competitors. Amazon’s pricing is shaped by the market’s price elasticity of demand, and the corporation often employs dynamic pricing tactics to be competitive while retaining profitability.

References

Etumnu, C. E. (2022). A competitive marketplace or an unfair competitor? An analysis of Amazon and its best sellers ranks. Journal of Agricultural Economics, 73(3), 924-937. https://doi.org/10.1111/1477-9552.12495

Kyle, A. S. (2019). Market structure, information, futures markets, and price formation. In International Agricultural Trade (pp. 45-64). CRC Press.

Mankiw, N. G. (2021). Principles of Microeconomics 9e. Cengage Learning Asia Pte Limited.

Varian, H. R. (2020). Market structure in the network age. Understanding the Digital Economy: Data, Tools, and Research, 137-150. https://people.ischool.berkeley.edu/~hal/Papers/doc/doc.pdf