Market Structures: Perfect Competition

Market structures are economic models that categorize industries based on the number of firms, the type of products they sell, and the ease of entry and exit for new firms.
The primary market structures are perfect competition, monopoly, monopolistic competition, and oligopoly.

Perfect competition is characterized by many buyers and sellers, homogeneous products, perfect information, and free entry and exit.
A perfectly competitive market has numerous participants.
No single buyer or seller has the power to influence prices.
Products are identical across all sellers; this is also known as a homogeneous product.
Buyers perceive no difference between products from different sellers.
All participants have complete and free access to information about prices, products, and production techniques.
Firms can enter or exit the market without facing significant barriers.
In a perfectly competitive market, firms are price takers, meaning they must accept the market price determined by supply and demand.
Demand curve faced by an individual firm is perfectly elastic (horizontal).
Profit maximization occurs where marginal cost (MC) equals marginal revenue (MR), which is also the market price (P).
In the long run, economic profits are driven to zero due to free entry and exit.
If firms are making profits, new firms enter and shift the market supply curve to the right, lowering the market price until profits are zero.
If firms are incurring losses, some firms exit, shifting the market supply curve to the left, raising the market price until losses are eliminated.

A monopoly is a market structure characterized by a single seller, a unique product with no close substitutes, and significant barriers to entry.
A single firm controls the entire market supply.
Monopolies sell products that have no close substitutes, giving the firm substantial market power.
High barriers prevent other firms from entering the market.
These barriers can be legal (patents, licenses), economic (high startup costs, control of essential resources), or strategic (aggressive pricing).
A monopolist is a price maker, meaning it has the power to influence the market price by changing the quantity supplied.
The demand curve faced by a monopolist is the market demand curve, which is downward sloping.
To sell more, the monopolist must lower the price.
Monopolies maximize profits by producing where marginal cost (MC) equals marginal revenue (MR).
Monopolies typically produce less and charge more compared to firms in a competitive market, resulting in deadweight loss (a reduction in total surplus).
Governments may regulate monopolies through price controls, antitrust laws, or by breaking them up to promote competition.

Monopolistic competition features many firms, differentiated products, and relatively easy entry and exit.
There are many firms, but not as many as in perfect competition.
Each firm has a relatively small market share.
Firms sell products that are differentiated, meaning they are similar but not identical.
Differentiation can be based on quality, features, branding, or location.
Entry and exit are relatively easy, but not as free as in perfect competition.
Firms may face some barriers such as brand loyalty or the need to invest in product differentiation.
Firms have some control over their prices because of product differentiation.
The demand curve faced by a monopolistically competitive firm is downward sloping, but more elastic than a monopolist's demand curve because of the presence of many competitors.
Firms maximize profits by producing where marginal cost (MC) equals marginal revenue (MR).
In the short run, firms can earn economic profits or incur losses.
In the long run, entry and exit drive economic profits to zero.
If firms are making profits, new firms enter, shifting the demand curve faced by existing firms to the left until profits are zero.
If firms are incurring losses, some firms exit, shifting the demand curve faced by remaining firms to the right until losses are eliminated.
Monopolistically competitive firms often engage in advertising and other forms of marketing to differentiate their products and attract customers.

An oligopoly is characterized by a few dominant firms, either homogeneous or differentiated products, and significant barriers to entry.
A small number of firms dominate the market.
The actions of one firm can significantly impact the market.
Products can be homogeneous (e.g., steel, oil) or differentiated (e.g., automobiles, smartphones).
Significant barriers prevent new firms from entering the market.
These barriers can include high startup costs, economies of scale, control of essential resources, or strategic actions by existing firms.
Firms are highly interdependent, meaning their decisions depend on the actions of their rivals.
Oligopolies can engage in collusive or non-collusive behavior.
Collusion occurs when firms cooperate to restrict output, raise prices, and increase profits.
Cartels are formal agreements among firms to collude.
Collusion is often illegal and unstable due to the incentive for individual firms to cheat.
Non-collusive behavior involves firms competing with each other.
The outcome of non-collusive competition can be analyzed using game theory.
The Cournot model assumes firms compete by choosing quantities.
The Stackelberg model assumes one firm (the leader) chooses its quantity first, and the other firms (the followers) respond.
The Bertrand model assumes firms compete by setting prices.
The kinked demand curve model suggests that firms face a demand curve that is elastic above the current price and inelastic below it, leading to price rigidity.