Market Structure

Perfect competition:

Perfect competition is a market structure that contains a large number of small sellers that produce a homogenous product and are price takers. Three characteristics of perfect competition include, first is the number of sellers as a large number of small sellers are in the market. No single seller can influence the price or quantity sold. The second characteristic is the type of product sold by each seller that sells identical products at the same quantity is also known as homogenous products. Third characteristic is the market power or price setting power. Firms in a perfectly competitive market have no price setting power. The market decides the price which is essentially the equilibrium price and thus firms in a PC market are known as price takers.

Firms that are price takers have no price setting power. The market decides a price which is the equilibrium price. Price makers can set their own price since they are a single seller. They set the price using a trial and error method to see the response of the market. Monopoly powers are usually price makers

Monopoly:

Monopoly is a market structure in which only a single seller exists. This seller regulates the price as well as a supply of the product. There are many advantages of a Monopoly power. The first is that they can make abnormal profits in the long run since they can set their own price. Monopolies also enjoy the benefit of economies of scale The second advantage of a Monopoly power is that they sell a unique product - each product sold by the sellers is different and not sold by other producers.This gives the Monopoly power an upper hand and provides it with a greater consumer base which further helps it maximise profit in the long run. Monopolies face the least amount of competition as they are the osle providers for that particular good or service. Moreover the Monopoly power also faces least competition due to the high degree of entry barriers. So monopolies are dynamically efficient because the producers who can produce products based on the future wants of the people research and development help keep them dynamically efficient and productive teacher wants of the people they also do this by surveying consumers.

But according to an economist's perspective a monopoly is unfavourable in a market due to the amount of disadvantages it has. Some disadvantages of a Monopoly power - it is highly disadvantageous to the consumer since the price is decided by the seller and not by the market. The consumers can be humiliated and exploited. Monopolies are the sole providers of goods and services and these products have very little or no substitute for which furthermore does not benefit the consumer. Due to the high degree of entry barriers monopolies also restrict the growth of various businesses in the market. Another disadvantage of X inefficiency - it is a failure to allocate resources efficiently because most of the time the Monopoly seller is a single seller so resources are not being allocated based on the cost of production. Reiterating the fact that monopoly sellers are a single seller so they can afford to produce lower quality products for the consumers.

Advantages of perfect competition

• There are lots of sellers in the market so the consumer can visit any seller.

• Prices may be lower because prices are decided by joint forces of demand and supply

• Earns abnormal profits only in the short run but make normal profits in the long run

- TR=TC, breakeven/normal profit - price drops, profit earned also drops

- TR>TC, abnormal profit - economic profit, supernormal profit because there is no entry barrier. - Attracts other sellers to enter the market.

Advantages of monopoly

• Enjoys the benefit of economies of scale - Make abnormal profit in the long run

• Keep some profit for R&D - quality of product increases, new innovation, benefits the consumers

• Dynamically efficient - producers who can produce products based on the future wants of the people

- R&D helps keep them dynamically efficient and predict future wants of the people

- Surveying consumers

Disadvantages of monopoly

• Less choices

• Higher prices

• Lower quality products

• X inefficiency - failure to allocate resources efficiently because most of the time monopoly seller is a single seller so resources are not being allocated based on the cost of production.

Disadvantages of perfect competition

• Cannot be producing a variety of product

• Fail to go for dynamic efficiency

• PC prices may be greater than monopoly prices

Oligopoly

Market structure where there is existence of few sellers in the market

Everybody can equally influence price and output

Below 10 sellers (8-10)

Example: Telecom market

Seller has price setting power like monopoly

Collusive oligopoly/cartel

Where all sellers come together and act like one and agree on a similar price and output

Example: OPEC

Not allowed in a country

Non-collusive oligopoly

Sellers don’t join together

Act independently

Follow price leadership: one seller will set the price and others will follow. One seller will set the price and others will follow. Either of the following two types of sellers decided the price. First - the seller who always makes profit. Other firms understand that this firm must be doing something right/pricing their products efficiently and so choose to follow this. Second - the seller who has a long experience in the market. Other firms trust this firm since they have a history in the market of the product and the firm also knows ups and downs of the market and has faced many adversities.

Product Differentiation:

Product differentiation is when firms supplying similar or homogenous products, compete on non-price factors to attract consumer demand. Please non-price factors include brand name, image shape, taste, smell, colour, durability and warranty periods. Examples of such competition could be soap, deodorant, laundry detergents etc. these products are supplied in the same market but make different claims about the quality of the product to attract consumer demand. In this market if a firm is able to attract consumer demand by claiming that its product is most superior it can regulate the price by charging higher prices to the consumers to make greater profits. This competition is mainly focused on the product features.

Entry barriers

Natural Barrier: Certain factors which prevent a firm from entering the market

• Economies of scale - monopolies can successfully reduce their prices making it difficult for other sellers to enter the market

• Legal barrier - Legally other sellers cannot enter the market. Eg: BEST buses

• Capital size - If a huge amount of investment is required, new sellers may not be able to enter the market.

• Historical reasons - If a company has made a good impression on its customers, consumers have no reason to buy from other sellers
  

Artificial Barrier: Created by sellers so competitors cannot enter the market

• Predatory pricing / price destroyer - In the event an existing firm sees new firms entering the market, the existing firm reduces their price so much that some small sellers cannot afford to stay in the market

• Restricting supply to rival firms - Firms restrict the suppliers from supplying inputs to rival firms possibly by threatening to withdraw their orders

• Exclusive deals - Monopoly seller will tell its retailer not to maintain any stock of products from competitor firms

• Tying / bundling - Consumers cannot buy from any other seller

How can govt restrict the power of monopolies

• Antitrust policies - Find those monopoly sellers who abuse their power and fine them

• Encourage competition: So prices drop

• Price capping - Setting a maximum price that can be charged by the monopoly power to ensure they do not exploit their consumers

• Taxing monopoly profit - Tax heavily on monopoly profits so monopolies feel that it isn’t profitable to produce a certain product and allow other sellers into the market

• Nationalisation - taking over of a private sector entity by the government