Market Structures and Competition: Understanding Different Types
Market and Competition
The market is a mechanism that gathers all the buying and selling activities of a specific product. It is the axis on which market economies and mixed economies are based. It facilitates the exchange of goods and services through the free operation of supply and demand.
Perfect Competition
A market is considered to have perfect competition when all goods and services are voluntarily exchanged for cash at a price set by the market.
Imperfect Competition
Imperfect competition is the most common market structure. In this type of market, the price is influenced by one or more companies. The less important a company is, the less influence it has on the price. Imperfect competition can be classified into:
- Monopoly: This is the extreme case of imperfect competition. There is no competition, and the single company has full ability to control prices.
- Oligopoly: In this type of market, only a few significant companies are involved.
- Monopolistic Competition: There are many companies, each having a certain margin of influence on the price.
Criteria to Classify the Market
- Level of concentration: This refers to the number of companies or sellers in the market.
- Influence on the price: Many sellers significantly influence the price, contradicting the principles of a free market.
- Degree of homogeneity: A market is considered homogeneous when its products are interchangeable; that is, each product can be replaced by another.
- Intensity of competition: This refers to the tension with which the various companies within the market struggle to sell more.
- Level of transparency: This is the amount of information available to both sellers and buyers.
- Freedom of entry and exit: Entering or exiting a market is not easy. Obstacles are called barriers.
Market Barriers
Barriers to entry are factors that impede or hinder the entry of new businesses into a market. Barriers to exit are costs that any company would have to assume to leave a specific market, as they may not recover a portion of their investment.
Market of Perfect Competition
- Cheap Production: Production is not perfect because the investments in produced goods are small, and the technology is inexpensive.
- Homogeneous market: There is no difference in quality, design, or performance of the products from different manufacturers.
- High degree of transparency and total freedom of entry and exit.
Evolution of a Perfectly Competitive Market
Where sellers make a profit:
- Growth: The entry of new merchants increases the supply of the asset in question.
- Saturation: Due to the excess supply, extraordinary benefits disappear, and some companies leave the market to dedicate themselves to other activities.
- Stabilization: No new companies enter the market, and the few remaining ones recover their customers and profits.
Monopoly
In a monopolistic market, a single company covers the total demand and has full power to decide the quantity to produce and the price. A company that controls an essential factor of production to obtain a good or service will be the only one able to offer it.
Depending on the existence of legal rights, monopolies are classified as public or private. Legal rights include:
- Patents: These are a form of legal protection.
- Administrative concessions: In exchange for certain conditions, a private company enjoys certain advantages, such as public sector names.
Nature of Service and Cost Advantages
Monopolistic firms produce a lower amount than what the market needs, thus increasing profits. Countries control this activity with antitrust laws and courts for the defense of free competition.