Market Structures: Perfect and Monopolistic Competition

Market Structures

• Market structures describe how firms interact, compete, and control prices within a market. There are four primary types.

Perfect Competition

• Definition: A market where many small firms produce identical products, and no single firm controls the market.
• Characteristics:
  • Many firms
  • No single firm has significant market power
  • Products are homogenous (identical)
  • Very low barriers to entry
  • Firms are price takers influenced by buyers
  • Examples include agricultural markets (like wheat or corn).
• Outcomes:
  • Allocative efficiency: Resources are allocated to maximize consumer satisfaction.
  • Productive efficiency: Firms operate at the lowest possible cost in the long run.
  • Normal profits: In the long run, firms earn enough to cover costs, including opportunity costs.

Monopolistic Competition

• Definition: A market with numerous firms selling similar, but differentiated, products.
• Characteristics:
  • Many firms
  • Product differentiation (products are similar but not identical, leading to brand loyalty)
  • Relatively low barriers to entry
  • Firms have some control over price
  • Incomplete information (buyers may not know all options)
• Examples: Restaurants, clothing brands.
• Outcomes:
  • Non-price competition (firms compete on product features, quality, and marketing)
  • Allocative inefficiency (price is typically higher than marginal cost)
  • Excess capacity (firms don't produce at the lowest cost)
  • Normal profits in the long run

Oligopoly

• Definition: A market dominated by a small number of producers.
• Characteristics:
  • Small number of producers
  • Exclusive firms (e.g. car industry, banking, supermarkets, some medicinal)
  • Potential for collusion (though illegal in many countries)
  • Few large firms dominate, each with significant market power
• Outcomes:
  • Price rigidity (stable prices due to tacit collusion or kinked demand curve)
  • Non-price competition (firms compete on factors other than price)

Monopoly

• Definition: A market with only one producer and no close substitutes.
• Characteristics:
  • Single seller
  • Unique product (no close substitutes)
  • High barriers to entry
  • Price maker (sets price and output level)
  • Imperfect information (consumers may not know full prices and practices).
• Examples: Utilities (e.g., water, electricity providers), patented drugs
• Outcomes:
  • Allocative inefficiency (monopolists charge higher prices than competitive markets)
  • Productive inefficiency (monopolies may not produce at the lowest cost)
  • Economic profits due to barriers to entry.

Monopsony

• Definition: A market with only one buyer and many sellers.
• Characteristics:
  • One customer (can be a government)
  • Limited buyers
  • Barriers to entry (moderate to high)
  • Price control : Buyer forces sellers to lower prices
  • Examples: Labor markets.

Explore perfect and monopolistic competition market structures. Understand characteristics like many firms, homogenous products, low barriers to entry, and differentiated products. Learn about allocative efficiency, productive efficiency, and normal profits in these markets.