Market Structures: Perfect Competition to Monopoly

Posted on Jan 29, 2025 in Economy

Market Structures and Competition

Competition is the rivalry among several firms that want to sell the same kind of goods or services to the plaintiffs in that market.

Types and Models of Market by Level of Competition

  1. Perfect Competition: The consumer is benefited most as it is at a very low price and a very high amount of goods are produced. The product sold is identical.
  2. Imperfect Competition:
    • Monopolistic Competition: Characterized by having a large number of bidders.
    • Oligopoly: Oligopolistic firms are able to influence the selling prices of their products.
    • Monopoly: Countries pass laws of competition.

Perfect Competition

A type of market in which there are many small firms producing a single, undifferentiated product, so that none of the producers can influence the price at which they sell their product.

Features of Perfect Competition

  • In this market, there are very few barriers to entry and exit.
  • It is a homogeneous product, i.e., there is no difference between the product sold by one company and that sold by the rest.
  • There is full information.
  • The product has no pricing power; companies are price-takers.

Short-Term Equilibrium in a Perfectly Competitive Market

Market conditions in the short run determine the behavior of all producers and all applicants for a product. The combination of supply and demand leads to a price and equilibrium quantity.

Monopolistic Competition

This market has a large number of suppliers due to low entry barriers, and they sell similar products that are differentiated between themselves.

Features of Monopolistic Competition

  • There are few barriers to entry and exit.
  • There are a lot of producers.
  • The good that is exchanged is a differentiated product.
  • The producer has some power to set the price.

Oligopoly

An oligopoly is a type of market that takes place in sectors where entry barriers to economic activity are high. This means that any company cannot enter the sector, either because of the large investment needed to produce the good or because of legal restrictions that limit competition in it.

Features of an Oligopoly

  • The number of companies competing in the market is small.
  • In general, companies tend to be large, and each has a significant percentage of market share.
  • The small number of bidders makes the decisions that one makes decisively influence what the rest will do.

Cartel: A formal agreement to perform various actions among firms operating in an oligopolistic market to achieve higher profits by common pricing, geographical distribution, or function of the market or limiting the overall production.

Market Share: The part of the global production of a sector that belongs to a company, product, or brand.

Duopoly: A smaller oligopoly that occurs when there are two companies.

Leader: Having a significantly higher percentage of market share.

Monopoly

A monopoly is a market in which one company controls all or most of the supply of a product.

Why Monopolies Exist

There must be major barriers:

  • One company controls all the resources necessary to produce that good.
  • When a company holds the control technology sufficient to provide a unique product. Microsoft is an example.
  • When a state allows a company to offer a certain product. This is called a legal monopoly, and for a long time, states have used tax collection causes.
  • Natural monopolies occur mainly in the public supplies of water, electricity, telecommunications cable, natural gas, etc. In all these cases, it is cheaper for a single company to perform the service. This is because of some high fixed costs. Or average costs are decreasing per unit, which is caused by these natural monopolies.

Consequences of Monopoly

As the bidder from any market demand and no competition, making its decisions looking only at their own interests. It seeks to get the maximum benefit possible, allowing you to set prices. This does not mean you can set the price you want without restrictions, because the market is limited by demand. So in a situation of monopoly, the price is always higher than when there is competition, and the quantity produced is lower.

Control of Monopoly

It is forbidden by the laws of competition. The reason is that it is a market rate with negative consequences for consumers, not only because they do not have a chance to choose, but because they are faced with higher prices than they would be in a competitive situation. This applies to oligopolies. In another case, it uses the administrative concession, and the state imposes the prices at which they have to sell your product.