Competition and Market Structures

Competition and Market Structures

1. Monopoly

   • A monopoly is an enterprise that is the only seller of a good or service. In the absence of government intervention, a monopoly is free to set any price it chooses and will usually set the price that yields the largest possible profit. Just being a monopoly need not make an enterprise more profitable than other enterprises that face competition: the market may be so small that it barely supports one enterprise. But if the monopoly is in fact more profitable than competitive enterprises, economists expect that other entrepreneurs will enter the business to capture some of the higher returns. If enough rivals enter, their competition will drive prices down and eliminate monopoly power.
     • Characteristics 1) There is a single producer and there is no difference between a firm and an industry. A firm itself is an industry. 2) A monopoly can be an individual proprietorship or partnership or joint stock company or a co-operative or a government company. 3) Monopolists have full control on the supply of a product in the market. Hence, elasticity of demand for a monopolists product is zero. 4) There is no close substitute of a monopolists product in the market. Hence, cross elasticity of demand is very low. 5) There are restrictions on the entry of new firms.

2. Monopolistic Competition

   • Monopolistic competition characterizes an industry in which many firms offer products or services that are similar, but not perfect substitutes. Barriers to entry and exit in a monopolistic competitive industry are low, and the decisions of any one firm do not directly affect those of its competitors. Monopolistic competition is closely related to the business strategy of brand differentiation
     • Characteristics of Monopolistic Competition: Many buyers and sellers Similar to perfect competition, there are many buyers and sellers in the market. However, there are fewer in Monopolistic Competition. Consumers have a wide variety of choices which is not offered by other market structures such as a monopoly or oligopoly. Slightly differentiated products Firms that operate in a monopolistic market have very similar products but are slightly differentiated to add value over the competition. Maximise profits Firms in a monopolistic market seek to maximize profit. In economics, this is where marginal costs equal marginal revenue.

3. Oligopoly

   • Oligopoly means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low.
     • Characteristics of an Oligopoly: A Few Firms with Large Market Share A market may have thousands of sellers, but if the top 5 firms have a combined market share of over 50 percent, it can be classified as an oligopolistic market. This is because the power is concentrated between a few sellers who are able to exercise power over the market. High Barriers to Entry Oligopolistic firms maintain their position through a number of barriers to entry. For instance, brand loyalty, patents, and high start-up costs are but to name a few. Interdependence Any action a firm takes in an oligopolistic market will strongly affect the actions of its competitors.

4. Perfect Competition

   • Perfect competition is a hypothetical market structure in which there are very many firms, each of which represents an infinitesimal share of the market. In a perfectly competitive market, if any firm is able to earn an economic profit, other firms will immediately enter the market, driving economic profit to zero.
     • Perfectly competitive markets exhibit the following characteristics: There is perfect knowledge, with no information failure or time lags in the flow of information. Knowledge is freely available to all participants, which means that risk-taking is minimal and the role of the entrepreneur is limited. Given that producers and consumers have perfect knowledge, it is assumed that they make rational decisions to maximise their self interest – consumers look to maximise their utility, and producers look to maximise their profits. There are no barriers to entry into or exit out of the market. Firms produce homogeneous, identical, units of output that are not branded. Each unit of input, such as units of labour, are also homogeneous.