Hello,
Today I would like to compare the four
types of markets in the last post to my blog. Bellow I would like to present a
brief comparison of four possible types of markets. Some of them are not
presented very much in every day’s life while others we can see everywhere.
Here are they:
Type of Markets
|
Perfect Competition
|
Monopolistic Competition
|
Oligopoly
|
Monopoly
|
Number
of Firms
|
Many / Very
|
Many / Several
|
Few
|
One
|
Freedom
of Entry
|
Unrestricted
|
Unrestricted sometimes restricted
by licencing
|
Restricted by economies of scale and
licencing
|
Restricted technologically, legally
or economically
|
Nature
of Product
|
Undifferentia
ted
|
Differentia
ted
|
Undifferen
tiated or Differen
tiated
|
Unique
|
Implications
for Demand Curve
|
Horizontal, firm is a price taker
|
Elastic, downward slopping, can
little control price
|
More inelastic, downward slopping,
can control price more
|
Most inelastic of all markets,
downward slopping, has increased control over price
|
Average
Size of Firms
|
Small
|
Small and medium sized
|
Big
|
Big
|
Possible
Consumer Demand
|
No preferences given, many choices,
demand in equilibrium with supply
|
Preferences to brands, many choices,
demand in equilibrium with supply
|
Few choices, either preferences to
brand or not, excessive demand and higher price paid when cartels or
collusion exist
|
No choice of product, excessive demand
not satisfied by supply, higher prices
|
Profit
Making Possibility
|
Normal profit in long-run and
possible economic profit for short time in short-run
|
Normal profit in long-run, possible
economic profit in short-run
|
Possible economic profit in
short-run and less possible in long-run
|
Possible economic profit in
short-run, and long-run
|
Government
Intervention
|
Minimum, dealing with external costs
|
Taxation, restricted entry
|
Collusion prohibition, taxation,
restricted entry
|
Taxation, price setting,
nationalization, restricted entry
|
Example
|
Wheat, milk, eggs
|
Coffee shops, clothing retailers
|
Oil production, sell phones, cars
|
Energy for cities (Enmax), public
transportation system for small to medium-sized cities
|
Technological
Innovations
|
Many as a possibility to have an
economic profit
|
Many as a possibility to have an
economic profit and develop brand
|
Many as a possibility to have an
economic profit, more money involved because of economies of scale
|
More money involved because of
economies of scale, sometimes no willing and restriction to innovations
|
Competition
Among Participants
|
High
|
Very high
|
Nonprice competition
|
No competition
|
As we can see the markets are
organised from perfect competition to monopoly what gives the idea of
increasing power of the companies over costumers on the market and explains why
the government sometimes has to interfere.
Below are graphs for the single firm
operating in possible four types of market. The ideal free competitive market
is represented in perfect competition graph:
This type of market is making normal
profit in short-run and long-run (0Q1aP1). This is classical type of
competitive market and though it is very rare to find in real life many
economists treat it as ideal. The demand curve D faced by single firm on the
competitive market is horizontal and it means that the firm cannot change the
price and all output produced will be consumed as there is no difference in
between the firms on the market. Also the firm’s marginal and average revenues
are same as price and do not change with additional units added. It allows to
achieve productive and alllocative efficiency in both short-run and long-run. With
the implication of economies of scale the cost and price curves will shift down
because of extensive competition.
Next is the monopolistic competition
graph:
Here we can see downward slopping flat
elastic demand curve D1 where there is the difference in between the companies
on the market and the customers show preferences of one firm over another. That
gives the company a little bit power over the prices charged and helps to
operate with economical profit in the short-run that is 0P1cQ1-0P2bQ1 where P2b
is the average costs and P1c are the price. But in the long-run it is
impossible because many firms attracted by this possibility are entering the
market and driving prices down to D2 curve and the firm is able to earn only
normal profits 0P2bQ1. The company is neither productive nor allocative
efficient because it is maximizing the profits and selling the output which has
maximum difference between revenues and costs. It is located on intersect of MR
and MC curves.Very similar to monopolistic competition is
oligopoly:
It is type of market where there are a
few large companies with either differentiated or undifferentiated products.
The entry into the market is restricted by the size of dominating firms and
sometimes licence is required. The companies have significant control over the
prices but because of the existing mutual interdependence the prices tend to
stay unchanged for long periods of time. This is illustrated on the kicked curve
which is more elastic on the top than after the price point. The companies are
more likely making economic profits in short-run and long-run though they often
are making only normal profits as in the example with MC2 and AC2. Again, for
the firm is better to make normal profit than change the price because it could
drive many customers out and cause loss. And, what is important, the
profit-maximising point is the same in both cases. This is one of the theories how oligopoly market is operating though. The other ones are game theory and price leader theory The companies are neither
productive nor allocative efficient.
The last type of the market is
monopoly:
This type of market is presented by
only one firm. The entry is restricted or blocked. The monopolist has significant
influence on the price and amount of output and as a result is producing at
profit-maximization point and never on the inelastic portion of the demand
curve. It is neither productive nor allocative efficient. This type of market
is most interfered and regulated by government because of the threat that
monopolist will make superprofits if is left unregulated. The government can
impose lump-sum or sales taxes, set the socially optimum or fair-return prices
on the product or nationalize the company. Without government intervention
the monopolies usually are making economic profit in short-run and long-run.