Market Structures Explained: Competition, Monopoly, and Oligopoly
Understanding Market Structures
The market is any means by which a match between the supply and demand of goods is established. The exchange of the asset is carried out at a fixed price. We say that the market is in equilibrium when it matches the wishes of the supply and demand, i.e., when the quantity supplied corresponds to the quantity demanded.
Market Structure Factors
Number of Participants
Refers to the number of companies offering the same product on the market and the number of applicants who are willing to buy. The number of participants in a market influences the way prices are determined.
Degree of Influence on Price
Refers to the possibility that a company can set the price of its product. When a company has the capacity to influence the price, it is said to have market power.
Product Homogeneity
In a market, we say that the product is homogeneous when all the units being offered are identical, and the consumer perceives them as such.
Existence of Barriers to Entry
In an industry, we say that there are barriers to entry when the state or the companies already installed on it use any mechanism to prevent the entry of new business ventures.
Perfect vs. Imperfect Competition
Perfect Competition
Occurs when no bidder with individual action can influence the product price.
Imperfect Competition
Occurs when the bidders, with their action, can influence the price of the product. This feature is present in monopolies, oligopolies, and monopolistic competition.
The Perfect Competition Market
Many Supply and Demand
No operator may affect the price of the product with their individual performance, and their supply or demand is negligible compared to the global market.
The Product is Homogeneous
The product sold by different companies is identical, and consumers do not find differences in the products offered in the market.
Complete Information on the Market
Employers know what prices consumers are willing to pay, and these, in turn, know the price at which the employers wish to sell.
Freedom of Entry and Exit of Firms
This means that any company wishing to enter this industry will not find barriers to entry by those already installed, and there are no obstacles to leaving the market.
The Monopoly
Many Applicants and Sole Supplier
The provider decides the price, fixing it so that it produces the greatest benefits. When setting the price, it is indirectly determining the quantity demanded, as both variables are related through the aggregate demand function.
Product Control
Without competition, you can put as much product in different market sectors, thereby increasing the numbers of sales or revenues.
Barriers to Entry
The monopolist creates all kinds of barriers to entry to preserve the privileged position which is a monopoly. In many cases, the authorities themselves impose them on strategic sectors.
The Oligopoly
Limited Supply, High Demand
There are a limited number of vendors in front of a large number of buyers, so that the vendors can exert some influence on price. As there are few companies in this market, there is a strong interdependence between them.
Product Differentiation
The product may or may not be homogeneous, but more often it is used to differentiate and get started to exercise more control over the market.
Barriers to Entry and Exit
There are big barriers to prevent further competition. For example, in mobile telephony, we need a state license to settle.
Monopolistic Competition
Many Supply and Demand
There are many suppliers and many applicants in this market.
The Product is Differentiated
The companies sell similar products but not identical. The company that gets a real difference will have established a monopoly relationship with its clients and shall monitor the price.
Free Entry of Firms
There are no barriers in this market. The permanence of companies is determined by the level of benefits it generated.