Competitive markets

Competitive markets

1. Perfect competition

   • Perfect competition is market situation where companies lack power to manipulate the price (price takers), and a welfare maximization. This results in an ideal situation goods markets and services, where the interaction of supply and demand determine the price.
     • Assumptions of perfect competition
       • Perfect competition is essentially based on both the number of buyers and sellers in the market is high. Thus, the total of the total production offered by each company individually it will always be small Likewise, there are also no buyers who monopolize a important part of shopping. There is, therefore, a high fragmentation of the market. What Consequently, companies will be price takers, facing a demand function horizontal, which is the market clearing price. The marginal revenue of the company, by Therefore, they will be a constant.
         • There is freedom of entry and exit in the market. The companies already established in it therefore lack the power to prevent others from joining the business. Thus, if it is a sector in which there are high profit rates, it will be normal for new companies to show their interest in entering, not finding obstacles to do so. Similarly, if there are losses, the most inefficient companies, especially in the long term, will choose to exit the market.
           • The different companies that operate in the market produce a homogeneous good, with similar characteristics. In this way, consumers will be indifferent between buying it from one or another company. Brands, and especially advertising, are meaningless in a perfectly competitive market for this reason.
           • There is perfect information. This means ca that all the economic agents that operate in the market, whether they are buyers or sellers, know perfectly well how the market works (the prices set by the different companies, the costs, etc.). This assumption is also called "market transparency"; the market is transparent and nobody has privileged information.
     • The Market Basis of Perfect Competition
       • To analyze the functioning of the perfectly competitive market we have to examine the behavior of the competitive firm. We already said before that it was necessary to distinguish between the short and the long term in the market. The same happens with the individual behavior of companies.

2. The monopoly

   • Monopoly is a market structure in which there is only one company on the supply side. As in that sense it moves away from perfect competition, an inefficient allocation of resources will be made, which is known as the "social cost of monopoly", and which is reflected in the existence of a higher price and a higher level of production. less.
     • Origin of the monopoly
       • Some of the possible causes of the appearance of a monopoly are:
         • The control of a productive factor that is essential for the manufacture of the good by a company, which would prevent the appearance of potential competitors in the market.
         • The existence of fiscal monopolies, which have their explanation in collection motives by the Public Treasury.
         • Legal barriers to entry (patents, administrative restrictions, international trade quotas) or economic (economies of scale, initial capital requirements, absolute cost advantages due to the use of superior techniques, product differentiation).
         • The existence of very high fixed costs that cause the appearance of increasing returns, with average and marginal cost curves always decreasing, in which case the most efficient thing is for a single company to supply the market: this is what we know as natural monopolies .
   • Characteristics of Monopoly
     • Monopolists have a negatively sloping demand function, as opposed to the fully horizontal demand function faced by the individual firm in perfect competition. Indeed, monopolists by definition face the entire demand function, and this generally has a negative slope.
     • Monopolies are price-offers, as opposed to what happens in perfectly competitive markets, where companies are price-taker. As we will remember, the price is given to companies in perfect competition, since they have to sell everything they produce at the equilibrium price, which is the result of the intersection of supply and demand. Monopolies, however, can set the price at which they wish to sell.
     • The price elasticity of demand for the monopolist is finite, compared to infinite elasticity of demand for the firm operating in an environment of perfect competition market
       • The price elasticity of demand was infinite in perfect competition, since the quantity that could be sold varied completely if the price set by the company departed, even minimally, from the equilibrium price
         • Thus, given that the goods produced by the different competitive companies are homogeneous, if a company decides to sell at a price slightly higher than the equilibrium price, no one is going to buy a single unit of product from it, since any rational consumer will decide to acquire these goods at any price. another competing company.

3. The Oligopoly

   • Oligopoly is a type of market in which there are few companies, and therefore its main feature is that there is an interdependence between the decisions that they are going to make, so that they have to assess the reactions of other companies when to make their own decisions.
     • The fact that there are few companies that supply the market is usually caused by the existence of barriers to entry, so the benefits are usually high in the long term. These barriers may originate from the existence of economies of scale, limited access to a certain technology, etc.
       • But companies in an oligopolistic market can also take strategic positions to dissuade others from entering, for example by threatening to flood the market and putting downward pressure on prices, creating excess production capacity, etc.
     • The good produced by these different companies is homogeneous, practically identical, so consumers will be indifferent between buying it from one company or another.
       • Some authors, however, do not give much importance to the fact that the product is differentiated or not, provided that only a few companies produce most or all of the total production, thus there is a high concentration in the market.
     • The degree of market concentration is usually measured from the proportion of sales represented by a few large sellers with respect to the total sales of the market or industry. The oligopolistic firm's decision variable can be either price or quantity. Depending on whether it is one or the other, we will study the Bertrand model or the Cournot model.
     • It may happen that a company, due to its importance in the market due to its volume or for other reasons, adopts the role of leader, and that the others make their decisions based on what it does; to know what will happen in that case we will study the Stackelberg model.

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