Market Structures: Monopoly, Oligopoly, and Competition
Market Structures: Monopoly, Oligopoly, and Monopolistic Competition
Monopoly
In a monopoly, a single provider controls the market and can determine prices. The company’s demand curve is the same as the market demand curve; to sell more, the company must reduce prices. Examples include RENFE (Spanish National Railway Network) and the postal service.
Causes of Monopolies:
- Control of a productive factor by one company.
- Dominance of essential raw material sources.
- Acquisition of a patent, creating a temporary monopoly.
- Control of national supply, often by state monopolies or concessionary businesses.
- Large market size and industry cost structure, leading to a natural monopoly where costs decrease as production increases.
Oligopolistic Markets
An oligopoly consists of a small number of vendors producing a homogeneous product and facing many buyers. These few merchants can exercise some control over prices, and the actions of one affect the others. This situation arises when only a few companies are in a market, so each company’s plans depend on the behavior of its competitors.
Pricing in Oligopolies:
Companies determine prices based on demand forecasts, considering rivals’ reactions. Due to uncertainty, several strategies are used:
- Predicting competitors’ actions and designing strategies accordingly.
- Forming a cartel to cooperate instead of compete, agreeing on market-sharing and prices.
- Initiating price wars when new companies enter an oligopoly, trying to increase their market share through successive price reductions.
Price Wars:
A price war is a situation where companies in an oligopolistic market engage in rigorous price competition, lowering prices significantly. If one company reduces its price, others must follow to maintain or increase their market share. Example: Phone companies.
Monopolistic Competition
Monopolistic competition is a market structure where many companies sell similar but not identical products. Differentiation between goods and services is key.
Key Characteristics of Monopolistic Competition:
- Fragmented Market: Many companies, none of which covers a substantial market share.
- Product Differentiation: Firms produce goods that consumers can distinguish, often through branding.
- Limited Price Control: Each company has limited power to set prices for its product when acting individually.
- Free Entry and Exit: No significant barriers to entry or exit in the sector, allowing new companies to enter freely.