Market Structures: Perfect Competition to Monopoly

Perfect Competition

Perfect competition describes a market structure where numerous small firms compete against each other. In a perfectly competitive market, no single firm has any significant market power. As a result, the industry as a whole produces the socially optimal level of output, because no firm can influence market prices. The price is determined by the free interplay of supply and demand.

Monopoly

A monopoly is a market structure composed of a single company or group that dominates the entire supply of a particular good or service.

Oligopoly

An oligopoly is characterized by the existence of a limited number of suppliers who exert some control over the price and are mutually interdependent.

Monopolistic Competition

Monopolistic competition is a market structure in which many companies sell similar, but not identical, products. Differentiation between goods and services is the key to monopolistic competition.

Terms of Perfect Competition

• Many companies are price-takers (accepting the market price).
• Many buyers and demanders.
• Homogeneous product.
• Perfect information.
• Free entry and exit of firms.

Price-Taking Firms

Firms in perfect competition are considered price-takers because the price for their product is determined by the market and they must accept it.

Benefits

There may be extraordinary profits in the short term if new companies enter. However, this situation will not last. As more firms enter, the increased supply will drive down prices, eliminating extraordinary profits. In the long term, there will be neither extraordinary profits nor losses.

Causes of Monopoly

• Exclusive control of a productive factor by a company or mastery of the most important sources of raw materials essential for the production of a good.
• Patent protection.
• State control of the supply of certain services.
• The existence of a market size and cost structure specific to a particular industry.

Oligopoly Price Fixing

Oligopolies may attempt to:

• Guess the actions of competitors and design strategies accordingly.
• Reach agreements and form cartels, choosing cooperation instead of competition.
• Initiate price wars.

Cartel: When firms act in unison, they can divide the market or agree on prices.

Price wars: This is a situation in a market where competing oligopolistic firms engage in a dispute, drastically lowering prices.

Market Quota

Market quota refers to the percentages of participation in a company's total market.

Keys to Monopolistic Competition

• The market is atomized (many small firms).
• The goods produced by companies are differentiated.
• Limited market power.
• No barriers to entry and exit.