Perfect Competition, Monopoly, and Monopolistic Competition: A Market Structure Overview
Perfect Competition
Definition
Perfect competition is a market structure characterized by a large number of buyers and sellers offering similar products. There is free entry and exit for both buyers and sellers, and no control or regulation over prices.
Market Conditions
A perfectly competitive market, also known as a “perfect market,” requires the following conditions:
- Product homogeneity
- Unrestricted mobility of resources
- Total clearance of products
- Large number of buyers and sellers
- Free competition
- Information and rationality of the agents
Market Equilibrium Price
In perfect competition, no single producer can directly influence the price. Companies cannot manipulate prices or quantities of a commodity. Supply is ensured, while demand, with numerous options, influences price determination.
The equilibrium price is established based on the supply curve (vertical and perfectly inelastic) and the demand curve (slightly bowed).
Monopoly
Definition
A monopoly is a market structure with a single seller of a good or service with no close substitutes.
It can also be defined as a market where one company controls the supply of a product in a segmented market, where demand can only be satisfied by that product.
Pure Monopoly Market Conditions
A pure monopoly exhibits these characteristics:
- No substitutes (consumers must buy from the monopolist)
- Unique product
- Control over price by manipulating supply
- Absence of competition
Examples include utilities, state-owned enterprises, and products sold under patent.
Market Regulation
Governments often regulate monopolies to prevent market dominance. They may use:
- Fixed amount taxes (licenses, profit taxes) to reduce monopoly profit without affecting prices or production.
- Per-unit taxes, which the monopolist may pass on to consumers, leading to higher prices and lower production.
Monopolistic Competition
Definition
Monopolistic competition is a market structure with many companies selling similar but not identical products. Product differentiation gives sellers some control over prices, but the availability of close substitutes limits their “monopoly” power, resulting in elastic demand.
Market Conditions
Key characteristics of monopolistic competition:
- Competition based on non-price factors (quality, service, location)
- Relatively easy entry and exit for producers
- Importance of advertising and product promotion
An example is the women’s clothing market, where producers offer differentiated products based on quality, design, and service.