Characteristics of a Perfect Competition in Business - Essay Example

Economists have identified different type of market structures like monopoly, monopolistic competition, perfect competition and oligopoly. All the market structures provide a different framework in which business is carried. The paper compares and contrasts the perfect competition and monopoly market by determining the way the resources are allocated. This helps to develop important findings and determine the efficiency in which the players in the market perform. Before moving on it is important to define the key terms Demand: Quantity of goods a consumer is willing to purchase at a particular price. Aggregate Demand: Total market demand of goods at a certain price. It is the sum of the total individual demands and gets affected by change in price. Supply: Quantity of goods a supplier is willing to supply at a particular price. Aggregate Supply: Total market supply of goods at a certain price. It is the sum of the total individual supply and gets affected by change in price. Perfect Competition is a market structure which is rarely a reality as there exist some information which is not available with all the individual players. It provides a framework based on which other market structures can be judged. Monopoly is another form of market structures which exists in some form and is price setters. Both this type of market provides a framework for the players to use the available resources and hold extreme position in the market structure chart as shown below (Perfect competition, 2010) Figure 1: Market Structure Thus the above chart demonstrates the market structure chart and holds extreme position thereby highlighting a few situations when such a situation exists. Perfect Competition is a type of market structure where there are many players, have homogenous products, there is freedom of entry and exit and also complete information is available about the product in the market. This is evident from the following example United States (US) has millions of vehicles in the country which are registered. The competition in this sector is very tough. It has nearly all the major vehicles producer in the country. This has given rise to price war and customers are getting lots of option. Some of the producers which are there are Ford Motors, General Motors, Chrysler, BMW, Honda and Hyundai. This puts a lot of pressure of different companies. This takes the US market towards perfect competition. It also satisfies the assumption of perfect competition as companies here earn only nominal profits. Large number of players: There are many producers of cars like Ford Motors, General Motors, Chrysler, BMW, Honda, Hyundai and many others. This leaves the company with very little to alter the price. Thus the prices are very similar and there is not much difference. This makes them more of a “price taker”. (Miller, 2008, pg 27) Identical Products: “The products produced are more or less similar” (Miller, 2008, pg 32). Every manufacturer has cars in all segments. Like in the luxury class, economy class and so on. Their cars are also very similar with very little difference to choose from. Thus, customers have a choice to make. Perfect Knowledge: The information with the customer regarding the prices of car is there. In case there is difference then the customer has a choice to pick other. (Lalwani, 2010) As there is complete information it creates healthy feeling among the consumers. There is also complete information regarding the way the cars are manufactured and the technology used. When a company supposes Ford comes with a new technology others follow suit. Thus information and technology is free to pass. Freedom of entry and exit: There is freedom of companies to enter and exit the market. (Characteristics, 2010) There are certain norms of the United States (US) government which the company has to adhere to and it is similar as every country has so but there is no legal barrier. This helps the company to decide its future course as there is freedom for both. Here also car manufactures try selling their car which will fetch them maximum profits. “This is when the marginal revenue = marginal cost” (Miller, 2008, pg 37). Since, there is so much competition this situation is also there. This is also seen in the diagram below. It can be seen that price is determined where supply matches demand for the market. Figure 2: Optimization of profit $ MC $ S ATC P AVC D Monopoly on the other hand is a market structure where there is a single seller who controls the market. The player has good control over the market and can influence the decision of the buyer and the market on a whole. The characteristics of the monopoly market structure is as follows Single Supplier: The market has a single supplier. The individual player takes all decision to influence the market. This makes it a price maker which in contrast to the perfect completion is different as they are price takers. (Borade, 2010) Unique Product: The player in the market supplies product which is unique and differentiated from the other. Since, it involves a market structure where an individual firm control so there is no substitute for the product. (Borade, 2010) Barriers to entry and exit: The monopoly structure has strong barriers to entry and exit. The barriers includes in the form of economies of scale, capital required is high, product differentiations, branding, distribution and suppliers network, availability of raw materials, and others. (Vives, 2001) The ability to develop a strong network and ensure that they are able to bargain with their suppliers regarding the goods they want and the price that will be offered also acts as a barrier (Freeman, 2003) Specialized Information: The individual player has specialized knowledge and expertise relating to the product which cannot be replicated by others. Since no one can enter the market as it will lead towards monopoly to dissolve the knowledge about the product with the player is very sensitive. (Monopoly, 2010) The graph for the monopoly looks as follows Figure 3: Monopoly graph Thus we see that both perfect competition and monopoly has contrasting effect and differences in the market structure. It appears that both of them are extreme positions as was seen in the above diagram highlighting the vast differences that exist between both the market structures. Analyzing the manner in which perfect competition is more efficient in comparison to monopoly and helps to ensure that the resources are used efficiently are seen below. Figure 4: Profit in market structure The above chart demonstrates the manner in which both perfect competition market and monopoly market performs. It is evident that perfect competition leads to a situation in a long run where players are able to just earn normal profits. This will lead to a situation where the players in the perfect market competition will take the price to be 4 (shown in the above graph). Monopoly on the other hand will set a price of 8 which will lead towards monopoly profits in the tune of 4. This leads towards inefficiency as the decision taken by the individual player is oriented towards ensuring that they are able to garner maximum profit. This will lead towards diseconomies of scale and makes the decision to be biased towards the player. Perfect competition on the other hand provides economies of scale and leads towards efficiency in the production process. This is due to better production methods adopted by the players. The players bring “a change in the assembly line of producing parts thus ensuring better benefits” (Mitchell, 2006, pg 1). It developed its method and used interchangeable parts in the assembly line. This helped to assemble it faster. This reduced the cost and also the labour used. This increased efficiency. This helped the players to reduce cost and gain advantage. “Using different technology also played part. It used a chain driven network to transport the goods to the site” (Mitchell, 2006, pg 1). This helped in saving cost. Thus it helped the company to gain. This helped the players immensely. The unskilled workers were also able to use it. By doing the same thing again they became efficient and this helped the company to reduce cost as the efficiency multiplied. This is shown below Figure 5: Economies of scale This thus demonstrates that perfect competition is different from the monopoly form of market structure and helps to improve the efficiency in the manner the resources are used by allocating the resources efficiently. This helps the consumers to ensure that they are not over exploited and pay the correct price for the products. (Yao & Gan, 2010) The paper thus presents the monopoly and perfect competition nature of the market structure by drawing examples from various business fields. It also highlights the manner in which the characteristics are met. It is evident that the seller concentration ratio is high, there are barriers to entry and exit, the market exhibits price sensitivity and there is stiff competition as players imitate each other. It highlights the manner in which perfect competition and monopoly differentiates and has contrasting effect on the market. The paper also finally shows the manner in which perfect competition highlights the efficiency in the use of resources and helps the consumers to get the correct goods at the right price compared to monopoly. 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