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
Best services for writing your paper according to Trustpilot
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.
Changes
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
profits.
This will attract new firms into
the market causing price to fall back to the equilibrium of PE
2. An increase in
firms costs
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. One of
the severe oligopolistic competitions subsists in the mobile phone industry
around the world. A monopoly exists when a particular person or business is the
only supplier of a certain product.
References
Anon., 2016. The Four
Types of Market Structures. Online
Available at: https://quickonomics.com/market-structures/
Accessed 5 January 2018.
Anon., 2016. Types of market structure. Online
Available at: https://www.economicshelp.org/microessays/markets/
Anon., 2017. THE STRUCTURE OF A STRONG FINANCIAL ADVISOR
MARKETING PLAN. Online
Available at: https://www.tarctraining.com/professional-programmes/the-structure-of-a-strong-financial-advisor-marketing-plan/
Accessed 19 January 2018.
Anon., 2018. Monopoly. Online
Available at: https://en.wikipedia.org/wiki/Monopoly#Market_structures
Accessed 18 January 2018.
Anon., n.d. Different Forms Of Market Structure. Online
Available at: http://www.tutorsonnet.com/different-forms-of-market-structure-homework-help.php
Accessed 20 January 2018.
Anon., n.d. Equilibrium of the Firm and Industry under
Perfect Competition | Economics. Online
Available at: http://www.yourarticlelibrary.com/economics/equilibrium-of-the-firm-and-industry-under-perfect-competition-economics/28853
Accessed 19 January 2018.
Anon., n.d. https://www.ultius.com/ultius-blog/entry/essay-on-market-structure.html.
Online
Available at: https://www.ultius.com/ultius-blog/entry/essay-on-market-structure.html
Accessed 18 January 2018.
Anon., n.d. Market structure. Online
Available at: http://www.sanandres.esc.edu.ar/secondary/economics%20packs/microeconomics_sl/page_11.htm
Accessed 11 January 2018.
Anon., n.d. What are the different market structures?. Online
Available at: https://www.quora.com/What-are-the-different-market-structures
Accessed 20 January 2018.
Anon., n.d. WOULD YOU LIKE TO START A BUSINESS?. Online
Available at: https://refdb.ru/look/1872572-pall.html
Accessed 18 January 2018.
Competition, T. E. O. M., 2015. The Example Of
Monopolistic Competition. Online
Available at: https://www.ukessays.com/essays/economics/the-example-of-monopolistic-competition-economics-essay.php
Accessed 11 January 2018.
Corbridge, R., 2015. What Does It Mean To Have A Digital
Consumer Experience?. Online
Available at: https://businessvalueexchange.com/blog/2015/06/26/what-does-it-mean-to-have-a-digital-consumer-experience/
Accessed 11 January 2018.
Gilani, N., 2018. The Four Types of Industry
Infrastructures. Online
Available at: http://smallbusiness.chron.com/four-types-industry-infrastructures-24729.html
Accessed 20 January 2018.
Lipovsky, W., 2017. 12 Monopolistic Competition , 33
Oligopolistic Competition. Online
Available at: https://firstquarterfinance.com/34-monopolistic-competition-examples-around-world/
Accessed 5 January 2018.
Scarchuk, M., 2013. Market Structures: Examples in the
Real World. Online
Available at: https://prezi.com/htq7pljqr-it/market-structures-examples-in-the-real-world/
Accessed 6 January 2018.
