1. Various Legal Forms of Firms

A business firm is an organization under one management set up to make profits for its owners by producing goods or services that can be sold in the market. The terms business, firm, and enterprise are usually used interchangeably. A firm can operate on more than one plants, which are physical structures or locations capable of independent production with some degree of autonomy . If a firm uses its plants for production of several stages of a single product, it is a vertical integration; if it produces heterogenous products using different plants, it is called a conglomerate.

1.1. Non-corporate Firms

Non-corporate forms include the proprietorship and the partnership that are owned by persons. Legally speaking, a person here can either be a natural one like we are, or a juridical one that might be a corporation or an estate.

1.1.1. The Proprietorship

The proprietorship, or sole proprietorship, is the least complex, most basic and common form a business can take, because:

1. No legal process is required to start a proprietorship.
2. Solely owned by one person, the proprietor.
3. The whole revenue of the firm comes to the proprietor as personal income, which is subject to personal income tax.
4. The total debts of the firm comes to the proprietor as personal debts, and there is no limit to the proprietor's responsibility.

Proprietorships are not necessarily small, some are large firms with many employees and hired managers. And they are by far the most popular form of business organization in the United States. The Internal Revenue Service estimates that there are over 13.5 million proprietorships in the United States. Needless to say, most of these proprietorships are small; while they make up over 70% of all businesses, they account for only about 6% of total sales.

1.1.2. The Partnership

A partnership is a proprietorship with more than one proprietor. Basically, it is no different from a proprietorship, only the number of owners expands to include more. When two or more people agree to share the profits and the responsibility of a business, a partnership is formed. Similarly, no legal process is required to start this kind of business. The partners just get together to sign an agreement entailing that who pays what part of the costs or how profits shall be divided and so forth.

In both proprietorships and partnerships, the owners are personally liable for the firm's debts and there's no limit to the liability, that means, both their personal and business assets are exposed to it. Each partner is both jointly and separately liable for all the debts of the partnership. Suppose you own one third of a partnership that goes out of business with a debt of $30,000, you owe your creditors $10,000, and so does each of your partners. But if your partners skip town, you owe the entire $30,000.

1.2. Corporate Firms

Corporate firm, or corporation, is a powerful alternative to sole proprietorships and partnership. It is a business formally established under legal terms and granted an identity separate from its owners. A corporation is a juridical person, different from the natural persons of its owners. By incorporating, owners of the firm create an organization that can legally own property, incur debts, and is otherwise granted many of the legal rights of a citizen, including the right to engage in litigation. To establish a corporation, a corporate charter must be obtained from a state government by paying a certain fee and filing appropriate forms.

Upon the establishment of a corporation, shares of stock(certificates of partial ownership) are issued and either sold or assigned. A corporation is owned by its shareholders, who are in a sense partners in the success or failure of the firm. Shareholders differ from simple partners, however, in that the liability of shareholders is limited to the amount they paid for the stock and that the federal government and all but four states levy profit taxes on corporations. They do not levy profit taxes on proprietorships and partnerships.

After part of a corporation's profit is paid to government as profit taxes, part of the shareholders' dividends, that is, the share of profits they receive from the corporation, are also paid to government as personal income taxes. This is different from a proprietorship or a partnership wherein income is levied only once.

2. Industrial Structures

The term industry is used to refer to groups of competing firms that produce similar products in the market. As is rather loosely defined, an industry can either be in a broad sense or in a narrow sense, depending on the issue in question, and it is possible for a firm to be an intersection of several industries. For example, a company that provides tyres is part of the rubber industry and the car industry at the same time. A package company that provides packaging service to a milk company is part of the milk industry, the dairy industry, the food industry and in turn the agricultural industry.

Industrial structure, or market structure describes the important characteristics of a market. The features that jointly determine if a market is a perfectively competitive market, a monopolistic market, a monopolistically competitive market, or a oligopolic market include:

• The number of firms: is there many or just a few?
• The products' resemblance: do firms in the market supply identical products or are there differences among them?
• The ease of entry into the market: can new firms enter easily or are they blocked by natural or artificial barriers?
• The forms of competition taking place: do firms compete only through prices or are advertising and product differentiation common as well?

2.1. Perfect Competition

A perfectly competitive market is characterized by the following:

• There are so many buyers and sellers that each exchange deals only with a tiny fraction of the total amount of products in the market.
• All firms sell identical, or homogeneous products.
• Perfect information is assumed, that is, buyers and sellers are fully informed with the price and availability of all resources and products.
• No obstacles exist to block the free entry and exist of firms and resources.

If these conditions are present in a market, individual participants will have no control over the price, which is solely determined by market supply and demand. Buyers and sellers are all price takers in that they have no ability at all to affect it but to "rake", or accept it as given. They are free to buy and sell, though, whatever amount that may maximize their interest. Nevertheless, no matter how much they buy or sell, their relative smallness to the market gives them no chance to have perceptible effect on the market price.

These characteristics limit the decisions open to competing firms and simplify the analysis of competitive behavior, but such a market as this can never be found in reality. In real world, firms do have some degree of control over price and the products vary; new firms cannot enter a market freely because of natural barrier or artificial barrier. Monopoly is one of them.

2.2. Monopoly

Monopoly is just the opposite of perfect competition, a market or industry in which only one firm produces a product for which no close substitutes exit. Monopolists are subject to market discipline, but they can set prices based on the quantity it will supply. For it to remain the sole provider of a good or service, a monopolist must find some way to prevent new entrants from entering the industry. Sometimes it is the government that erects the barriers to entry. They grant an exclusive license to one producer on a particular product. For example, in the United States, such public utilities as electric power and gas companies, most of which are privately owned, have traditionally been shielded by the government from competition. Sometimes, however, a producer is endowed with an exclusive access to a natural resource that can be found nowhere else. If a jewelry company in South Africa acquires a unique deposit of blue diamonds, it becomes a natural monopolist of the blue diamonds in the world.

2.3. Monopolistic Competition

A market in which many sellers compete to sell a basically the same but differentiated product, and in which new entry is possible is referred to as a monopolistically competitive market. A monopolistic competition has features as following:

• Relatively large numbers of firms, each satisfying a small but not microscopic share of market demand with a similar but not identical product.
• Firms don't take the reaction of rivals into account when choosing prices and sales targets.
• No perfect substitute of other firms can be found for a product by one firm.
• Firms don't cooperate, for example, to set prices, block new entries, or to decrease competition. They do not do that.
• Relative freedom of entry exists.

2.4. Oligopoly

Another important market structure between perfect competition and monopoly is oligopoly, a market dominated by just a small number of firms(oligopolists) and entry of new competitors is difficult or impossible. More than half the market output is made by three or four major firms. Many industries, such as steel, automobile, and oil, are oligopolistic. Their products may be either differentiated or standardized. Since an oligopolistic market has only a few firms, each firm must consider the effect of its own policies and strategies.

Let's take a look at the characteristics of oligopolistic markets:

 

• Only a few firms supply the entire or nearly entire market with a product that may be standardized or differentiated.
• Oligopolists can influence the price.
• New entry is difficult or impossible.
• Oligopolists are aware of their interdependence and always consider the reactions of their rivals that may be prompted when they select prices, output goals, advertising budget, as well as any other business policy.

As for why some industries evolve into an oligopolistic market structure and some don't, reasons are not very clear. Anyway, an oligopolistic market structure can often be traced back to some form of barrier to entry, such as economies of scale, legal restrictions, brand names built up by years of heavy budget advertising, or control over an essential resource.

2.5. A Table to Sum Up

The four main kinds of market organization in the United States are summarized as below:

Market Structures in the U.S.

	Number of firms	Products	Firms have price-setting power	Free entry	Characteristics	Example
Perfect competition	Many	Homogeneous	No	Yes	Price competition only	Wheat farmer
Monopolistic competition	Many	Differentiated	Yes, but limited	Yes	Price and quality competition	Music industry
Oligopoly	Few	Either	Yes	Limited	Strategic behavior	Automobile
Monopoly	One	Unique	Yes	No	Constrained by market demand only	Electric power