Perfectly Competitive and Monopoly Market - Essay Example

There are various kinds of market structures in any given industry within the economy. A market is structured differently based on the characteristics of competition within the market. At one extreme is perfect competition and at the other extreme is a monopoly. The type of market structure of a firm in a given industry influences the way the company conducts business and how pricing strategies and how to obtain the quantity supplied. However, pricing strategy and quantity supplied all affect profit maximization for the firm (Besanko, et al. 2011 p., 78).

In a monopoly market, there exists only one supplier of goods and services. This may be due to various reasons, for instance, restricted government entry into the market and the creation of a monopoly following the firm's merger. Besides, Producers that have patented over ideas, copyright, or names provide them exclusive rights to supply a good or service exhibit monopoly. Such is a characteristic of a monopoly where the supplier has exclusive ownership of a given scarce resource. All these sources of monopoly power enable it to set its market price. Consumers lack close substitutes and as such, they set prices as they wish. In a monopoly, the market price is set above marginal cost, and there is a positive economic profit earned by the firm for each unit supplied.

On the other hand, under perfect competition, there are many buyers and many sellers. And every player is provided with the perfect information about the market. As such the firm must accept the price determined through the forces of demand and supply. The firm is thus considered a price taker --it can produce as little or as much as it likes without affecting in any way the market price in any way. Each firm must at the same time match the price offered by their competitors since the products are identical in many ways. Or else, consumers can shift their purchases to the competitor’s firm. There exist fewer differences in quality and quantity of goods and services between sellers. This is characteristic of a perfectly competitive market structure where products can easily be substituted. In other words, the company’s decision in a perfectly competitive market about how much to supply or what price to all the supply to the consumers depends on the competitiveness of the market structure.

A local taxi firm, for instance, is an excellent example of a player that can be considered to be in a perfectly competitive market. Local Taxi Company operates in the vehicle industry where there are many consumers of their service and at the same time many sellers who are their colleagues in the same industry.