Types of Market Structures - 1650 Words

Types of Market Structures (Essay Sample) Content: Types of Market StructuresAny industry is composed of firms producing identical, similar goods or products and the market structure is defined by how they compete against and with each other.Perfect competitionThis is when a number of small firms are competing against each other. All firms in this kind of competitive industry strive to be producing the optimal output level at the possible minimum possible unit cost. Barriers to entry are few if any and prices are determined by forces of demand and supply. Individual firms are price takers and have to accept the price set by the market. Perfect or pure competition is very rare in the real worldMonopolyThis is when a firm has no competition in that specific industry. Output is reduced with the aim of driving up prices and increasing profits. The firm is producing at below less the optimal output while producing at a higher cost than can be done in a competitive environment. An example is when a government creates a mono poly over a specific industry it wants to control like electricity supply and generation. Another example of a pure monopoly is professional sports leagues like the Barclays Premier League in the UK.OligopolyThis is when only a few firms exist in a specific industry. In order to drive up profits, the firms come together or collude to reduce output thereby driving up prices just like in a monopoly. The select group has total control over price and has a high barrier to entry. In many instances, the incentive to cheat on each other drives the firms to compete against each other ultimately. Examples include large telecommunications companies in a country which may not exceed 2 or 4.Monopolistic competitionThis kind of industry has many competing firms each with a similar but at slightly different product or service. Examples of this kind of industry are restaurants and hotels which all produce and serve food of different variety and in different venues. Another example is clothing sto res. The costs of production are above what can be achieved if all the restaurants or clothing stores served or sold identical products.Analyzing Similarities and DifferencesBy analyzing the following features and characteristics, it is possible to bring out clearly the similarities and differences that exist among the four market structures.Firm numbers: These are many in the cases of perfect completion and monopolistic competition. They are few in oligopoly while only one firm exists in a monopoly.Average firm size: The average size of the firm is small in perfect competition and in monopolistic competition. It is big in oligopoly and monopolyEntry freedom: It is free to enter into a perfect completion industry just like it is for a monopolistic competition. Entry is restricted for entry into oligopoly while it is limited or blocked for a monopolyProduct nature: The product is homogenous in a perfect market situation. It is unique in a monopoly while in a differentiated in a mono polistic competition. In oligopoly, the product can be undifferentiated or differentiated.Demand curve implications: In a perfect market, the demand curve is horizontal. It is downward sloping and relatively elastic in a monopoly and in monopolistic competition. In oligopoly it is downward sloping and relatively inelasticConsumer demand possibility: It is highly elastic in monopoly and oligopoly while it is medium elastic in perfect completion and monopolistic competition.Possibility of profit making: In perfect competition, it is profit in the short-run and no profit in the long-run. It is profit in both short and long-runs for the monopoly and oligopoly. A monopolistic competition only experiences profit in the short run only.Government Intervention: There is no government intervention in perfect competition and monopolistic competition. While there is possibility of government intervention in oligopoly, there is very big possibility in a monopoly.Price change possibility: Perfect competition firms are price-takers and cannot change the price. A monopoly can change the price while a monopolistic competition has a very small possibility of changing price. An oligopoly firm has a relatively big possibility of changing prices.Analysis of...