Comparing Market Structures

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.