Market Structures: A Comprehensive Overview
Market Structures
Perfect Competition
Perfect competition describes a market with many buyers and sellers. No single producer controls the price; it is determined by the market. This structure is common with agricultural products.
Conditions for Perfect Competition:
- Firms are price-takers.
- Many buyers and sellers exist.
- Products are homogeneous (no difference between products from different sellers).
- Perfect information exists (all participants know market conditions).
- Free entry and exit for firms.
Operation of Perfectly Competitive Markets:
Supply and demand determine the market equilibrium price. At this price, firms decide how much to produce. Each firm accepts the market price as fixed, with no influence over it. The demand curve for a competitive firm is horizontal or perfectly elastic. The firm can sell as much as it wants at the market price, but cannot raise the price.
Benefits:
While the equilibrium price is the same for all firms, profits are not. This is due to differences in individual firms’ resources (plants, machinery, etc.). Excess profits attract new firms, while losses cause firms to exit. In the long run, there are no excess profits or losses.
Imperfect Competition: Monopoly
Imperfect competition exists when individual companies can influence the market price. Monopolies consist of a single company supplying a particular good, with the power to influence its price. The market demand curve is the firm’s demand curve. To sell more, the monopolist must lower the price. Monopolies are also characterized by product homogeneity and barriers to entry.
Example: While Nike and Adidas produce similar goods, branding differentiates them.
Causes of Monopolies:
- Exclusive control of a productive factor (e.g., a company controlling the only source of a raw material).
- Patents (granting temporary monopolies).
- State control of certain services (e.g., postal service).
- Natural monopolies due to market size and cost structure (e.g., utilities like water and electricity).
Regulation of Monopolies:
- Breaking up the monopoly into multiple companies.
- Preventing monopolies from forming through antitrust laws.
- Regulating existing monopolies (e.g., imposing taxes, setting prices to eliminate excess profits, or requiring prices similar to perfect competition).
Oligopolistic Markets
Oligopolistic markets have a small number of sellers who exert some control over price and are mutually interdependent. Strategic interdependence arises when a firm’s plans depend on its rivals’ behavior.
Pricing in Oligopolies:
- Firms try to anticipate rivals’ actions.
- Firms may form cartels and agree on prices or market share.
- Price wars can occur when firms try to increase market share through successive price reductions.
Example: OPEC (Organization of the Petroleum Exporting Countries) is a well-known cartel.
Monopolistic Competition and Product Differentiation
Monopolistic competition describes a market structure with many companies selling similar but not identical products. Product differentiation is key, and there are no barriers to entry.
Trademarks and Free Entry/Exit:
Each firm differentiates its product, acting as a monopolist for its particular brand. Brand loyalty gives firms some power to adjust prices. Advertising and personalized service play important roles in creating and maintaining product differentiation.
Key Features of Monopolistic Competition:
- Fragmented market (many small firms).
- Differentiated products (consumers can distinguish between brands).
- Limited pricing power for each firm.
- No barriers to entry or exit.
The Debate About Advertising:
Advertising can signal product quality. The information conveyed may not be in the ad’s content, but rather in its existence and expense.