Perfect Competition, Monopolistic, Oligopoly, Monopoly - Essay Example

Perfect Competition, Monopolistic, Oligopoly, Monopoly Introduction The investigator seeks to uncover different kinds of market structures based on their characteristics, similarities and difference with respect to price and outputs the determination. In addition, the paper analyzes and comment upon and contrast the economic efficiency of the outcomes under perfect competition and monopoly. In this context, the researcher explains whether the allocative and productivity efficiency can be achieved in both markets (perfect competition and monopoly). In the light of these, market structure is defined as a framework in which a firm chooses to enter the market. The researcher discusses four types of market structures, perfect competition, oligopoly, monopoly and monopolistic competition markets. A monopolistic competition market structure is a situation characterized by a relative number of sellers trading in homogenous but differentiated commodities (Norman, Thisse & Phlips, 2000, p. 34). The traded products have close substitutes, and hence the firm attracts a stiffer competition. Oligopoly market structure is one where there are few number of competing interdependent firms. Monopoly refers to a market structure in which they are few sellers and many buyers. It results when there is the sole producer of a commodity with no close substitutes. Perfect Competition market is where there are many sellers and buyers selling homogenous goods and prices and output are determined by the economic forces of demand and supply. The main characteristics of each market Perfect competition Many Sellers The perfect competition market have many sellers. The sellers are adequate in the market such and therefore a single decision by a particular firm in terms of prices, and output attract no impact on the equilibrium prices and quantities in the market. Many Buyers There are many buyers in the market with perfect information about the prices and quantities. Sellers cannot, therefore, manipulate the customers based on prices and quantities as the value of costs is determined by the economic forces of demand and supply. Firm are Prices Takers The firms in the perfect competition markets are price takers. The firm cannot, therefore, sell at different (at) price that the prevailing rates. Homogeneous Goods The sellers and buyers in the perfect competition marketing trade in homogeneous goods. The goods sold are similar and thus a seller has no option to sell at the prevailing prices in the market to make the normal prices. Perfect Information There is complete knowledge with respect to goods sold, prices and quantities. Sellers cannot manipulate the buyers who attach values to the commodities sold making firms operate under normal prices. No transportation costs There are no transportation costs in the market. The market structure assumes that sellers only sell around their local markets and hence walk into the markets freely with their goods. Free entry and Exit There are no barriers to entry and exit, and this is at the discretion of the sellers. Firms tend to enter the market when it is favorable and quite during the upheavals. Sellers may switch in between the various homogenous products depending on the one that sells and demanded. Monopolistic competition There are many firms with less market share. There are a vast number of differentiated products a feature that distinguish it from perfect competition market structure. Products differentiation is in the form of styles, location, pricing strategies, brand name, packaging, and advertisement. The firms enter or leave the market at their discretion. Monopoly There is restricted entry and exit from the market Monopolist restricts entry into the firm due to increased market power arising from economies of scale. A single firm may own a fundamental factor input hence locking out others hence enjoying a greater market share. Due the economies of scale the marginal cost of production declines and reduced total costs of production. A single Seller and Many Buyers In a monopoly market structure, there is a single seller producing a product with no close substitutes hence synonymous industry and firm. However, the firm benefit from a range of buyers that have no option hence buy at the Monopoly’s set prices despite restricted quantities. Unique Products (Heterogeneous) The firms in a monopoly market structure produce heterogeneous products. Therefore, there is less competition in the industry, and the firm can make supernormal profits in the short run since there are many buyers. Monopoly is the Price Maker The power possesses a higher degree of market power. The firm was thus able to charge prices at the equilibrium prices by manipulating the quantity of outputs supplied, but still find consumers buying in bulks as the firm is sole in the industry. Oligopoly Sell standardized or differentiated commodities. There are restrictions to entry due to economies of scale and huge initial capital investment requirements. Oligopoly market consist of few large rival firm and firm are keen on the competitors output, pricing, and advertising strategies in order to respond appropriately. Similarities and Differences: Price and Output Determination In a monopoly market structure, the firms have market power with little competition. The firm are price makers and hence restrict output while charging the prices above the Marginal Cost; that is, P>MC as shown in the diagram. Firms, therefore, produce at MC=MR but charges at AR (demand curve). On the other hand, in Perfect competition market, the firm’s demand curve is horizontal. Hence, firms are price takers at produce and sell where P=MR=MC=AR. The only condition is that firms maximize their revenue by producing more goods (7000 as shown in the market) where the slope of the MC curve is positive. With respect to Monopolistic completion, there is a similarity to that of a monopoly as they produce at MC=MR and hence charges at P>MC. On the other hand, Oligopolistic market have a kinked demand curve which leads to price rigidities. The prices cannot be changed as firms compete stiffly, charging a higher prices leads to a reduction in quantity and hence consumer shift to substitutes from the rival firms and lowering leads to an increase in quantity in the short run and a decrease in the long term hence rigidity in prices but competes in terms of warranties, gifts, quality, advertising, discounts and after-sales services to increase sale. Monopolistic The monopoly produces where MC=MR and the price charged is along the demand curve (AR) Curve. Monopolistic The perfect competition market produces where MC=MR=AR=P. The oligopoly produce Oligopoly The firms have two options based on increasing or decreasing prices that are ultimately rigid. An increase in prices leads to a loss of customers to rival as the upper part of demand curve is more elastic than that below the kink. If the firm decrease the prices, sales rises, but it is a short run as businesses in the industry follow suit to cut prices. In case the follower mostly reduces the price, the leader suffers due to decreased sales hence the companies avoid cutting prices and sell their commodities at the prevailing market prices. Economic efficiency of the outcomes under perfect competition and monopoly Allocative efficiency is based on determining how resources are utilized in production of the combination of commodities that are basic to the society. On the other hand, productivity efficiency is focused on minimization of the costs incurred on production of goods and services required by the consumers. Therefore, economic efficiency entails producing the right (allocative) amount in the right manner (productive efficiency). Under perfect competition, productive efficiency is achieved in the long run where the equilibrium price= minimum average total cost (min ATC) and hence the firm utilizes the lease-cost technology to thrive. Allocative efficiency on the other hand occurs where price= marginal cost (P=MC) as the price measures the benefits derived by the society from marginal units of a particular goods while the marginal cost measures the sacrifice or the cost to society of the forgone goods so as to produce a particular good. Allocative efficiency is thus attained under perfect competition dynamic adjustments in prices of commodities through automatic reorganization of economic forces of demand and supply as the disequilibrium causes either expansion or contraction until the initial equilibrium is automatically restored. On the other hand, a monopoly firm cannot achieve productive efficiency since it produces at an output much less than that of min ATC. The X-inefficiency id due to lack of competitive pressure to make monopolist produce at the minimum possible costs. In addition, the monopoly does not achieve Allocative efficiency since the price (the value consumers attach to product) charged is above the Marginal Cost (opportunity cost) hence the condition of P=MC is violated. Conclusion The paper has discussed four market structures; perfect competition, monopoly, monopolistic competition and oligopoly. Each market structure has distinct features based on the number of firms and buyers, price and output determination, goods sold (Norman, Thisse & Phlips, 2000, p. 67). The paper has uncovered that economic inefficiency in monopoly market and economic efficiency in perfect competition. Reference Norman, G., Thisse, J. F., & Phlips, L. (2000). Market structure and competition policy: Game-theoretic approaches. Cambridge [etc.: Cambridge University Press. Read More