Understanding Market Classifications: Perfect Competition, Monopoly, and More

Market Classifications

• According to the law of the country:
  • Free market: Transactions are free.
  • Intervened market: Prices and quantities traded are imposed from outside the market.
• According to the amount of information agents:
  • Transparent: Agents are strongly related and have all possible information.
  • With friction: Agents do not possess all information.
• According to characteristics of the goods:
  • Perfect market: The merchandise is perfectly homogeneous.
  • Imperfect market: The same merchandise is available in various models with different characteristics.
• According to the power available to the operator:
  • Normal market: Neither buyers nor sellers may intervene in the price.
  • Market constraint: Buyers or sellers may act on the price or quantities traded.

Perfectly Competitive Market Characteristics

For a perfectly competitive market, the following conditions must be met:

• The goods should be homogeneous.
• There must be many buyers and sellers (atomized).
• It must be transparent; agents have to be informed.
• There must be freedom of entry and exit; there can be no legal or economic impediments to enter or leave the market.

Monopoly

The monopoly is part of imperfectly competitive markets, particularly related to the existence of barriers to market entry. Speaking of monopoly as a market model, we refer to situations in which one party has influence on the price, i.e., a forced market.

Do not confuse a monopoly market with the following situations:

• The protection of intellectual property, i.e., rights that musicians, writers, etc., have for their works.
• The temporary operating reserve that the law gives the creators of brand, design, and manufacturing models, known as industrial property.

Oligopoly

An oligopoly exists in a market where, regardless of the number of vendors, several of them have a significant market share. A duopoly is when two vendors share the market.

Cartel

A cartel is a group of companies that, without losing their independence, maintain an agreement to reduce or cancel competition by fixing prices or carving up the market.

Monopolistic Competition

A market is in this situation when many companies offer products that, being very similar, are distinguishable by some unique features. The role of advertising in these markets is critical because business competition arises not only in price but also in product differentiation.

Failures of Perfect Competition

The market has several limitations. On the one hand, it causes cyclical downturns in the overall economy, and on the other, it produces an uneven distribution of income and wealth. Besides, there are certain situations, so-called market failures, in which the market itself generates economic and ecological imbalances.