Perfect Competition, Monopolistic Competition, Oligopoly, and Monopoly - Example

Perfect competition, monopolistic competition, oligopoly and monopoly Introduction There are 4 different types of market that normally exists. These are Perfect competition, Monopoly, Oligopoly and Monopolistic competition. Unlike perfect competition market the rest of the three markets are an example of imperfect competition. The different markets have their own characteristics features and example. In the following pages the four different kinds of market are explained along with the particular characteristics of each of the markets. After explanation of each of the market along with the characteristics of the markets a comment is made on the economic efficiencies of outcome under perfect competition and monopoly. It is tried to be analyzed whether the efficiency of outcome is achieved under perfect competition or is achieved under monopoly competition explaining the reason for each case. The main characteristics of each market There are mainly 4 different types of market that exists. The 4 different types of market are Perfect competition, Monopoly, Oligopoly and monopolistic competition. Perfect competition In perfect competition there are many firms that exist in the market. Each of the producers produces similar kinds of goods. So there is a lot of competition between the different producers of goods. since in this market the nature of goods that is produced by the different industries is identical and homogeneous so the prices of the goods is not set by the producer of the good but the demand that exists in the market. In a perfect competition market the barriers to entry into the market is very less or is free. So citrus paribus any number of firms can enter into the market. In perfect competition there are many consumers who buy a standard product from no. of different small businesses. As it is found that no seller in the market is too big so they are in not a position to affect the price. Hence it is found that sellers and buyers in the market accept the price that is prevalent in the market. The graph of perfect competition is shown in the following figure. The price at which the demand and supply curve intersect is the price the consumers have to pay. Figure 1 supply and demand curve under perfect competition. (Collins, 2015) An example of the perfect competition market is the fruits market or the market for fish. This is because in these cases the products are standardized and hence the prices are determined by the market. Oligopoly In an oligopolistic market on the other hand there are few firms that exist in the market. As compared to the perfect competition there are few firms that exist in the market. Whereas in perfect competition there are no barriers to entry to the market in case of oligopoly market there are significant barriers to entry. There are two types of oligopoly that exists based on the degree of homogeneity of the product. In case of pure oligopoly the products that are produced by the producers are homogeneous similar to the case of perfect competition. However in case of differentiated oligopoly the products are not homogeneous but differentiated from one another. Unlike the case of perfect competition where the firms have no control over the prices of goods that they charge and the prices are totally determined by the market, it is not so in case of Oligopolistic market. In Oligopoly market as the companies control a significant portion of the market they can exercise certain degree of control, on the prices. However as the products are homogeneous if one of the companies reduce the price other companies follow the trend. Figure 2 Demand cost and revenue under Oligopoly (Hirschey, 2008) Example of Oligopolistic market is the airlines industry or the auto mobiles industry. Monopoly Monopoly market can be defined as the market where the firm is considered as the only seller of the good or services in the market and it does not have any close substitute for its products. The barrier to entry in case of the monopoly firm is very high as it restricts the other companies from entering into the market. The main characteristics of the firm under monopoly market are: The monopolist has the freedom of charging different price from different consumers The market does not have any close substitute for its products and the firm is considered as the single seller of that particular product. The firm can continue its operation only when there is existence of no other firms in the market. The main difference that exists between monopoly and perfect competition is that in case of perfect competition the numbers of participants in the market are less whereas in case of monopoly the firm is the single seller of the goods and services. In case of oligopoly the firms are interdependent which is not experienced by the firms under monopoly market. Figure 3: Monopoly market The figure represents that the demand for the product under monopoly market slopes downwards towards the right. New legislations have been introduced by the government of Qatar for eradicating the practice of monopoly in the market and encouraging the practice of fair competition among the firms in the market for the benefit of the consumers. The exclusive dealership of cars is considered as an example of monopoly in Qatar (Taylor and Francis Group, 2003). Monopolistic Competition: Monopolistic competition can be explained as the market in which the barrier to entry for the new firms are less since the firms under monopolistic competition competes with the firm selling similar but not identical products. The profit of the firm will be affected if it fails to differentiate its product from its competitors. The main characteristics of monopolistic competition are: The firms experiences few barrier to enter and exit in the market The firm is engaged in selling similar products The products are differentiated in the market on the basis of color, size and brand In case of perfect competition the products are closely substitute of each other whereas in case of monopolistic competition the products are differentiated from each other. In case of monopoly the firms experiences high barrier in entry and exit whereas in case of monopolistic competition the firm experiences few barrier for entry and exit in the market. Figure 4: Monopolistic Competition The above figure represents that there exist difference between the total cost and total revenue which results in increase of profit. But in the long run the firm generates zero economic profit. The example of Monopolistic market in Qatar is the coffee house market in Qatar which is monopolistically competitive for example the growth and expansion of Costa coffee in Qatar is through differentiation in its product. Economic efficiency of the outcomes under perfect competition and monopoly As found from the above characteristics of the different market it is clearly found that in a perfect competition market the goods are homogeneous. There is a large no., of firms that exists in the market. As there are large no. of firms that exist in the market and all of these firms produce almost identical goods so no firm in particular have the power to control the prices. The price of the product in this case is determined by the market as the market is perfectly competitive and all information that is available to all the players of the market. As no player in the market has more information than other players of the market so there is no information asymmetry. There are practically no or very less barriers to entry. So it is found that in this case economic efficiency of the outcomes should exist. An example of this type of market is the apple market. In an apple market the apple is a standardized product that is produced or rather sold by different sellers in the market. In this case the price of the apple is set by the demand of the fruit in the market. The seller will have no control of the price of the product but will have to follow the price trend prevalent in the market. As compared to this in case of a monopoly market one of the seller has better economy of scale or has information or produces a goods that only he can in the market. In this case the seller will be able to leverage his position and charge the price that he feels like to make the desired amount of profit. For example as in the case of Qatar if there is only one dealer in the market he will set the price of the car the way he feels like and this will result in the fact that allocative or productive efficiencies will not be able to achieve. This will result in consumption distortion and all the consumers would not be able to afford the goods. Figure 5 Dead weight triangles Conclusion The markets in the world can be classified under two broad headings that are perfect competition and imperfect competition. In perfect competition where as there are large no. of producers, in case of imperfect competition there are few producers who control the prices. The characteristics of different market are seen in the above essay. After studying the different market and their characteristics it can be stated that economic efficiency of outcome can be achieved under perfect competition but not under monopoly. References Collins, K., (2015).Exploring Business. New York: Flat World Education, Inc. Hirschey, M., (2008). Managerial Economics. OH: Cengage Learning. Taylor and Francis Group, 2003. The Middle East and North Africa. London: Psychology Press. Read More