Market Structures and Economic Concepts: Competition, Monopoly, and More
Item 6: Perfect Competition Market
It is difficult to find markets in reality that perfectly align with the ideal of perfect competition.
Features:
- Many buyers and sellers in the market.
- Atomization of the market and concentration of homogenous products.
- There is perfect and transparent information.
- No brands.
- Free entry and exit of firms.
Note: Possible barriers to entry include high initial costs. The tendency is for production and profits to be zero.
Monopoly
A market where there is only one buyer (monopsony) or one seller (pure monopoly).
Oligopoly
A market with few suppliers and many buyers. Products tend to be very homogeneous (close substitutes for each other). There are high barriers to entry in these markets, requiring strong initial investments. Each company is very attentive to the actions of its competitors in order to react accordingly.
Possible behavior of these companies:
- Cooperation or partnership (cartel or collusion): Setting a single price and sharing the market by areas.
- No cooperation or partnership: Price war, price leadership by one company, or anticipation strategies.
Cartel: An illegal agreement between companies in an oligopoly to reach an agreement among themselves not to compete by establishing a single price.
Monopolistic Competition
This market structure has similar characteristics to both perfect competition and monopoly. There are many buyers and sellers. There are brands, and products are close substitutes, but each company is a monopolist in its own right. Intensive advertising is used to differentiate the product from competitors.
Item 8: Market Failures
A market failure is a situation where the market cannot allocate factors of production correctly on its own, requiring state intervention.
Economic Cycle
The time interval in alternating periods of boom and slowdown/recession.
- Depression: Increased public spending, increased public revenue, increased deficit, and increased unemployment.
- Peak/Expansion: The opposite of depression.
Public Good
A good where there is no rivalry and no exclusion. This leads consumers to prefer to be “parasites,” benefiting from the good without paying for it.
Externalities
Benefits or losses in the production or consumption by one agent that are different from those produced or consumed. Example: Environmental deterioration.
Advantages of Imperfect Competition
- Stimulus for innovation.
- Greater variety of products.
- Lower prices.
- Easier entry and exit of firms.
National Competition Commission
Governments, through an organ called the National Competition Commission, monitor and promote increased competition in markets by:
- Issuing resolutions or rules on competition matters.
- Acting as an arbiter in competition matters.
- Conducting studies on the market.
- Promoting transparency in markets and monitoring for cartels.
Welfare State
A set of principles that market economy countries introduced into their constitutions after the Second World War. Since then, governments have increasingly intervened in the economy to emerge from global crises. These ideas were copied from planned economies, and European countries began to guarantee basic rights for citizens, including health, education, housing, and culture.
Item 7: Natural Resources
Natural resources are those obtained from nature (land, oil, wood). These factors are considered constant in the short term. While applications can change, the quantity cannot. The value of a natural resource is determined by the value we gain from its use (usufruct). The income from natural resources is called rent.
Capital Market
A market that is not totally free. The European Central Bank intervenes through monetary policy on the supply and demand for capital to alter the equilibrium interest rate. The interest rate is the price of money and depends on the type of operation: higher risk leads to higher interest, longer time leads to higher interest, and more guarantees lead to lower interest.