Market Structures: Oligopoly, Monopoly, Perfect Competition, and Monopolistic Competition - Example

Market Structures; Oligopoly, Monopoly, Perfect Competition, and Monopolistic Competition : Introduction Economists have identified four main types of competition in the market-monopolistic, perfect, monopoly, and oligopoly competitions. The type of the market structure directly influences the behavior of the firm; whether it’s efficient and the amount of the profits that it can generate. In this research paper I will explore the aforementioned types of the market structures and their implications in the market. Monopoly Monopoly occurs when the market has many buyers but there is only one seller that is in control of the product supply and its price. The single supplier in the market assumes significant market power and can determine the price of the product. This type of market faces little competition due to the higher barriers to entry, such as the initial costs, or the significant market influence by the monopoly company. Sources of Monopoly Powers The economies of scale: Monopolies are usually characterized by the decreasing costs for the relatively a large range of the production. The decreased costs coupled by the large amount of the initial costs gives the monopolies the advantage over the potential competitors. Other factors that are linked to the economies of scale include; long-term average costs, size of the industry, and among others. Technological superiority: a monopoly is at a good position in acquiring, integration and the use of the best possible technology in the production of its goods in contrary to its entrants that lacks the financial muscles to use the best available technology. Others include capital requirements: some of the production processes that require relatively large amounts of the investment capital, development costs/fixed costs, large research or the substantial sunk costs highly limit the number of the companies in this industry. No substitute goods: a monopoly usually sells the goods that do not have close substitute. This makes the demand of the good relatively inelastic thereby enabling the monopolies to extract the positive profits. Legal barriers: the legal right provides the monopoly the market of the goods. For instance, the intellectual property rights such as the copyrights and patents gives the monopoly the exclusive control of the selling and control of the production of the certain goods. Other sources of power for the monopoly include; deliberate actions, network externalities, and control of the natural resources. Characteristics of Monopoly Single seller; in the monopoly market there is only one seller. The seller controls the supply of the product and determines the price of the product. Additionally, a monopolistic is also in control over the whole market because the monopolistic offers a single service that is purchased by several buyers. Unique product; A monopolistic offers a unique service and product. The monopoly should has their own idea and design for the product and service. All the units of the product are very similar and there are no any alternative to that particular commodity in the market/firm; no close substitutes. The firm may put in use the specialized information such as the copyright and trademark in establishing of the legal authority over the production of some of the goods and the services. Barriers to Entry; the success of the monopolistic in the market/firm can be largely attributed to the barriers to the entry. Indeed, they don’t have competitors because the barriers to entry are very strong; this prevents and discourages other companies from entering into the firm. Therefore, the monopoly presents the barriers in order to prevent the potential competitors from entering into the market. In fact the barriers can be legal in that the firm takes benefits of tariffs, copyrights and the trade restrictions. Profit in the Long Run; the monopoly can earn a lot of profits because there is no fear of the competitive seller in the market. Consequently, if the seller makes abnormal profits in the long-run, he cannot simply quit from the firm. However, this scenario is rather impossible under the perfect competition. Lack of Competition; the lack of the business competition is one of the main characteristic of the monopolistic. The monopoly controls the supply of the entire product and has a lot of buyers. In fact the monopoly is the price maker. Perfect Competition Perfect competition describes the markets that there are no participants that are large enough of having the market power of setting the price of the homogeneous products. Due to the strict conditions in the perfect market, there exist few if any competitive markets. Pareto efficient allocation of the economic resources affirms that perfect competition serves as the natural benchmark against which to contrast the other market structures (Khan, & Pakistan Institute of Development Economics, 2007). Characteristics of Perfect Competition Many suppliers each with the insignificant market share; the firms in the firm are too small in comparison to the overall market to affect the price through the change in its own supply. Every individual firm is assumed to be the price taker. Identical out produced by each firm; in the perfect competition, the market supplies the standardized or homogeneous products that are the perfect substitutes for one another. No barriers to the entry and exit; in the perfect competition there is no entry and exit barriers thereby making it easy for the companies to exit or enter the market. Perfect information; all the producers and consumers have perfect knowledge of the prices, quality, utility, and the changing market conditions. Homogeneous products; the products in the perfect market are the perfect substitutes of each other. They have almost the same characteristics and qualities. Non-increasing returns to scale; the lack of the economies of scale (increasing returns to scale) ensures that the perfect competition has always the sufficient number of the firms in the industry. No transaction costs; the buyers and sellers in the perfect competition do not incur the costs in making the exchange of the goods and services in the perfectly competitive market. Profit maximization; the firms in the perfect markets are assumed to be selling their products where the marginal costs meet the marginal revenue. This is the point where the profit is generated. Other characteristics include; a well defined property rights in the perfect competition determines what to be sold, rational buyers, and no externalities. Monopolistic Competition A monopolistic competition is the type of the imperfect competition whereby many producers sell the products that are usually differentiated from one another. This can be done by branding or quality thereby making the products not perfect substitutes. Characteristics of monopolistic competition Product differentiation; in the monopolistic competition, the firms sell the products that have the perceived or real non-price differences. However, the differences are not large to an extent of eliminating other types of the goods as the perfect substitutes. The goods in this market perform almost the same basic functions but have differences in the qualities such as the style, type, reputation, quality, location and the appearance (Nocco, Ottaviano & Salto, 2014). Many firms; The presence of the many firms in the monopolistic market gives the freedom for the individual companies to set the prices without involving other firms/companies in the strategic decision making in regard to the prices of the other firms. Additionally, each of the firm’s decisions has the negotiable impact on the industry/market. No entry and exit costs; in the long-run, costs of entry and exit for the monopolistic firms. Any firm in the monopolistic market unable to meet its costs can leave the market without having to incur the liquidation costs. In fact, the firms have no exit costs, no sunk costs, and have low start up costs. Market power; monopolistic firms have some degree of the market power. The market power means that the firms have the power over the conditions and terms of the exchange in the market. Additionally, a monopolistic firm can be able to raise the prices of its products without losing its customers. Furthermore, the firm can also lower the prices. The source of the monopolistic firms’ market power is not lack of the entry barriers but rather the relatively few competitors. Imperfect information; in the monopolistic competition, there are no sellers or buyers that have complete information such as the market supply or market supply. Independent decision making; the firms in this market sets the terms of the exchange in independent manner. In fact the action by one firm has a negligible impact on the overall market demand. Excess Capacity; the quantity of the output produced by the monopolistic firms is smaller than the quantity that minimizes the average total costs. Monopolistic firms have the excess capacity because they can increase the output and lower the ATC of the production. Oligopoly Oligopoly is the type of the market structure or industry that is usually dominated by the small number of the sellers. It results from the different forms of the collusion that reduce the competition and lead to the higher prices for the consumers. Characteristics Number of forms; this market has few numbers of the sellers. This means that the action of one firm can influence the action of the other firms. Product differentiation; the products in this market can be differentiated or homogeneous. Entry and exit; the barriers to the entry are very high. Some of them include economies of scale, licenses, patents, complex technology, and among others. Long run profits; the oligopolies usually retain long run abnormal profits. Perfect knowledge; the firms in this market have the perfect information of their own costs and the demand functions. However, their inter-firm information may not be that complete. Ability to set the prices; the oligopolies are usually the price setters rather than the price takers. Other characteristics include; interdependence, and non-price competition. Differences Ability to set prices In the perfect competition, the firms are not able to set the prices because the prices depend on the market price. Therefore, the buyer and the supplier are usually not allowed to change the prices. Under the monopolistic competition, the sellers are able to change the prices when they want. This is because of the similarity of the products but having different quality, brands, name, and design of the product. Under the oligopoly, it’s a market that is most depend on the strategic. When one seller lowers the price, other sellers will also do the same. The monopoly on the other hand is usually the price-maker; he is able to set the price of the product. Output determination The output determination in the perfect competition occurs where the price is equal to the minimum ATC. Pure monopoly on the other hand output determination occurs where Marginal Revenue is equal to the Marginal Cost. It maximizes the profit where the TR-TC is greatest. The monopolistic competition output determination occurs where the MR=MC. The price that they charge would usually be on the demand curve (Askar, 2013). The oligopoly firms usually produce at an output that is less than the output of the minimum ATC Economic efficiency of the outcomes under monopoly and perfect competition For the perfect competition the productive efficiency occurs when the Price=minimum ATC while the allocative efficiency occurs where the Price=MC. The monopoly competition on the other hand, achieves its productive efficiency where the Price is equal to the minimum ATC. However, monopoly firms do not achieve the productive efficiency because they produce the output that is less than the output of minimum ATC. Its allocative efficiency occurs where Price is equal to the marginal cost. However, this efficiency is not achieved because the price (what the product is worth to the consumers) is above the marginal cost (opportunity cost of the product). Economies of scale make the monopoly firms most efficient market model in some of the industries (Nocco, Ottaviano & Salto, 2014). Conclusion The concept of the market structure is critical to both the economics and marketing. Each of the four structures of the market structures represents a generic characteristic of the type of the real market. Market structure affects the market outcomes through its various impacts on the opportunities, motivations, and the decisions of the economic actors participating in the market. References Askar, S. S. (2013). On complex dynamics of monopoly market. Economic Modelling, 31, 586-589. Khan, A., & Pakistan Institute of Development Economics. (2007). Perfect competition. Islamabad: Pakistan Institute of Development Economics. Nocco, A., Ottaviano, G. I., & Salto, M. (2014). Monopolistic Competition and Optimum Product Selection. The American Economic Review, 104(5), 304-309. Read More