There are four
fundamental types of market structures: perfect competition, oligopoly,
monopolistic competition, and monopoly. Perfect competition is where a various
firms compete with a similar product. Monopolistic competition relates to a
market structure, where many small firms compete with differential products. An
Oligopoly represents a market structure where a small number of firms compete
with each other. A monopoly is a one firm controls all the market.
Perfect competition characterizes a market structure, where a huge number
of small firms compete against each other. In this situation, a single firm
does not have any convincing market power. As a result, the industry as an entire
produces the socially optimal level of output, because not any of the firms
have the ability to affect market prices.
The main idea of perfect competition rely on a number of
assumptions: all firms maximize profits , there is free entry and
exit to the market, all firms sell
completely the same products, there are
no consumer preferences. By analyzing those assumptions it becomes quite evident,
that we will hardly ever find perfect competition in real life. This
is a significant aspect, because it is the only market structure that can, in
theory, result in a socially optimal level of achievement.
There is a Diagram for perfect competition
The industry price is controlled by the cooperation of Supply and Demand,
leading to a price of PE.
The individual firm will increase output where MR = MC at Q1
In the long run firms will make normal profits.
in long run equilibrium
1. The effect of an
increase in demand for the industry.
If there is a rising in demand
there will be an increase in price Therefore the demand curve and for that
reason AR will shift upwards. This will cause firms to make supernormal
This will attract new firms into
the market causing price to fall back to the equilibrium of PE
2. An increase in
The AC curve will increase
therefore AR< AC Firms will now begin making a loss and as a result firms will go out of business. This will cause supply to fall causing prices to rise. Examples of perfect competition Agricultures are one of the finest perfect competition examples. In this aspect, there are many farmers produce their product and sell to government at the fixed prices. Generally, interest rates are raised or slashed by all firms at the same time. The firms operating in the retail industry are a good example of perfect competition. Monopoly Under a monopoly is commonly understood as ranch structure that meets the following conditions: • production of all Oral controllers only one seller, called the monopolist. In other words, the firm-monopolist is the only producer of the product and represents the whole of Oral; • the monopolist produce the commodity is special in his riding and has no relatives in manila. Accordingly, the demand for the product when you change the price of goods other Oracle changes of the nose, and therefore peers the elasticity of demand monopolization of goods and other Oracle products economy is very low; • monopoly completely secret for the entrance to Oral new firms. A monopoly implies that one company is the only manufacturer of products that have no analogues. Buyers at this situation have no choice: they are forced to buy the products of the enterprise-monopolist. A monopoly is a specific type of economic market structure. A monopoly exists when a specific person or enterprise is the only supplier of a particular good. As a result, monopolies are characterized by a lack of competition within the market producing a good or service. A monopoly can be recognized by certain characteristics that set it aside from the other market structures: · Profit maximizer: a monopoly maximizes profits. Due to the lack of competition a firm can charge a set price above what would be charged in a competitive market, thereby maximizing its revenue. · Price maker: the monopoly decides the price of the good or product being sold. The price is set by determining the quantity in order to demand the price desired by the firm (maximizes revenue). · High barriers to entry: other sellers are unable to enter the market of the monopoly. · Single seller: in a monopoly one seller produces all of the output for a good or service. The entire market is served by a single firm. For practical purposes the firm is the same as the industry. · Price discrimination: in a monopoly the firm can change the price and quantity of the good or service. In an elastic market the firm will sell a high quantity of the good if the price is less. If the price is high, the firm will sell a reduced quantity in an elastic market. Examples: only one airport in the town, heat water. Monopolistic Competition Monopolistic competition is a type of market system, which contains elements of a monopoly and perfect competition. Such as a perfectly competitive market system, there are big amount of rivals in the market. Each competitor is sufficiently differentiated from the others that some can charge greater prices than a perfectly competitive firm can and it is the main dissimilarity. This following suppositions are the main in building of monopolistic competition: all firms maximize incomes, there are free entry and exit to the market, firms sell differentiated products, so users can choose one product over the other. Now, those assumptions are a bit closer to reality than the ones we looked at in perfect competition. Nevertheless, this market structure will no longer outcome in a socially optimum level of output, because the firms have more power and can impact market prices to some degree. An example of monopolistic competition is the market for cereal grains. There is a great number of various brands (e.g. Cap'n Crunch, Lucky Charms, Froot Loops, Apple Jacks). Most of them probably taste slightly different, but at the end of the day, they are all breakfast cereals. Diagram monopolistic competition short run The diagram for monopolistic competition is the same as for a monopoly. The firm maximisers profit where MR=MC. This is at output Q1 and price P1, leading to supernormal profit. Monopolistic competition long run In the long-run, supernormal profit encourages new firms to enter. This declines demand for existing firms and leads to standard profit. Efficiency of firms in monopolistic competition Allocative inefficiency. The above diagrams show a price set above marginal cost. Productive inefficiency. The above diagram shows a firm not producing on the minimum point of AC curve Dynamic efficiency. This is possible as firms have profit to invest in research and development. X-efficiency. This is possible as the firm does face competitive pressures to decline cost and provide better products. Examples of monopolistic competition Monopolistically competitive firms are most common in industries where differentiation is possible, such as: · The restaurant business · Hotels and pubs · General specialist retailing · Consumer services, such as hairdressing Oligopoly Oligopoly is a type of imperfect competition market, characterizing the actions of several sellers in the market, the appearance of new ones is difficult or impossible. If there are two manufacturers in the market, then this type of market is called duopoly, which is a special case of oligopoly, meeting more often in theoretical models than in real life. Oligopolistic markets have the following features: 1) a small number of firms and a large number of buyers. This means that the volume of the market supply is in the hands of several large firms that sell the product to all small buyers; 2) differentiated or standardized products. In theory, it is more convenient to consider a homogeneous oligopoly, but if the industry produces differentiated products and there are many substitutes, then this set of substitutes can be analyzed as a homogeneous aggregate product; 3) the presence of significant barriers to entry to the market, i.e. high entry barriers to the market; 4) firms in the industry are aware of their interdependence, so price control is limited. Examples of oligopolies can be called manufacturers of passenger aircraft, such as Boeing or Airbus, car manufacturers, home appliances, etc. Another definition of the oligopolistic market may be the value of the Herfindahl index, which exceeds 2000. The pricing policy of the oligopolist company plays a huge role in her life. As a rule, it is not profitable for a firm to raise prices for its goods and services, because it is likely that other firms will not follow the first, and consumers will "go" to the rival company. If the firm lowers prices for its products, then, in order not to lose customers, competitors usually follow the lowered price of the company, and the prices for the goods they offer are also reduced: there is a "race for the leader". Thus, among oligopolists, so-called price wars often occur in which firms set a price on their products that is not greater than that of a leading rival. Price wars are often disastrous for companies, especially for those that compete with more influential and large firms. There are four models of price behavior of oligopolists: 1)a broken demand curve; 2)collusion; 3)leadership in prices; 4)pricing-plus pricing principle 1. The model of the broken demand curve was proposed by the American economist P. Suisi in the 40s. XX century. In which the reaction of the oligopolist is analyzed to change the behavior of their competitor. There are two types of influence of market participants on price changes by an oligopolistic firm. In the first case, prices can be published without attention to its actions and retain the previous price level. In the second case, competitors can follow the oligopolist firm, changing prices in the same direction. 2.Secret conspiracy (cartel), when firms are negotiating with each other in relation to prices, volumes of production, sales. 3.Leadership in prices is a model in which oligopolists coordinate their behavior with the tacit consent to follow the leader. 4.Price-plus pricing is a model associated with the planning of output and profit, in which the price for products is established on the basis of: average costs plus profit, calculated as a percentage of the average cost level. Kinked demand curve Conclusion Market structures play a key role in the way a firm is able to do business. By understanding what sort of market structure that a firm is placed in, that firm will be able to see if the cost of business is worth continuing to fight for. The factors that separate the different types of market structures can be the difference in whether or not a start-up firm will be able to become successful or be driven from business by the major players that currently exist in that special market structure. Every market has it's own meaning, features and examples. In a perfect competition market, new firms are able to continually enter the market so long as they offer goods or service to a consumer base that is well received. Monopolistic competition has many sellers who sell different goods that are substitutes. Oligopoly markets are the most popular markets in our time. 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