Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly - Coursework Example

Name: Subject: Professor: Date: Perfect competition, Monopolistic competition, Oligopoly and Monopoly Introduction An economic market is the system where multiple parties engage in exchange of services and products. The earliest forms of economic markets majorly involved barter trade. Market systems have evolved and the current systems make use of monetary value in exchange of services and products. Market systems are made up with a number of firms that produce homogeneous products. There exists four different types of market structures and they include; perfect competition, monopoly, oligopoly and monopolistic competition. This article will therefore base its contextual analysis on the four types of markets describing how each operates. This article will also highlight the strengths of each market over the other. The similarities and differences will be based on price and output determination. Monopoly is a type of market structure that is controlled by one seller and many buyers. The seller has the powers to control the prices of the market. Perfect competition is an ideal market that is perfect as the name suggests. In perfect competition, there is unlimited number of consumers and producers. The demand curve is elastic and this indicates that every seller benefits from the conditions set. Oligopoly is a type of market that small firms control the greater percentage of the market and they control everything including prices among other demand variables. Monopolistic competition on the other side is a type of market where the firms have freedom to enter or leave. The only difference from perfect competition is that in monopolistic competition, firms have differentiated products. Perfect competition Perfect competition as already stated in the introduction segment is an ideal market. A perfectly competitive market has features that cannot exist in the real world scenario (Tremblay and Tremblay 123). The features of a perfectly competitive market include; unlimited number of buyers and sellers, flexible demand curve that is so perfect, freedom of entry to the market. The baseline in this type of market is that many of the sellers are offering identical products. The prices in this market are fixed. They do not fluctuate much when the demand surpasses supply. Sellers are forced to accept the market conditions and the already fixed prices. The number of buyers is unlimited. This therefore indicates that demand for commodities is always constant. Perfect competition operates on an open assumption. This assumption states that both the buyer and the seller are fully aware of how the market operates (Tremblay and Tremblay 124). In a perfectly competitive market, the level of output by sellers has no effect on prices. The prices are already fixed despite the level of output displayed by sellers. This is hard to be manifested in the real world market conditions. Based on the above mentioned market conditions, it is very hard to find a perfectively competitive market existing in the real world. The conditions stated above indicate that there is always demand due to unlimited number of buyers. Most industries in the current economy prefer oligopoly. Diagram 1: perfect competition graph Diagram 1 explains perfect competition. Firms are likely to enter the market, make supernormal profits and then disappear. This is because firms have the freedom of entry and exit. An entry of a new firm will shift the supply curve to the while an exit will shift the supply curve to the right. Shift of the demand curve to the right leads to lower prices until all profits are exhausted. Monopoly Monopoly is a market structure that is operated by only one firm. The firm is the only sole supplier of the required products. This therefore directly indicates that the number of sellers is only limited to one. The single firm in monopoly can be described with several terms which include; price creator and profit maximizer (Hall and Lieberman 282). The firm is responsible for setting the prices according to conditions available. Since the firm is the only single provider of the product, buyers have no option but to comply with the already set price. The powers of a monopolistic market come from the single fact that they are the only producers of the product in question. They therefore have the powers to set prices that fit their needs. Oligopolistic market can also exhibit monopolistic features but the only difference is that monopoly involves only a single firm while oligopoly makes use of cartels. Monopoly in most cases is limited by the government. This is simply because the firms are capable of setting discriminatory prices. This does not mean that monopolies are illegal but it is a form of consumer protection from greedy firms or innovators. However, monopoly has various sources of power which can be perfectly explained by the economies of scale (Hall and Lieberman 283). Monopolies use economies to set prices of their products. When monopolies enter a market they set a higher market price which they start reducing when any sign of competition starts manifesting. This is perfect as most of the new competitors will not be able to keep up while they struggle to survive (von Stackelberg 86). In a monopolistic market, prices are also determined based on the output. Where the demand factor is stretched and elastic, monopolies produce large quantity of low quality products which they sell at cheaper prices. In a market segment where the demand pattern is non-elastic, monopolies produce products that are of high quality and sell them at expensive prices. Pricing in monopoly market segment is set with reference to the marginal cost. The prices are set above the marginal cost (Hall and Lieberman 288). There are a number of companies that have operated or are still operating as monopolies. They include Microsoft which has been dealing with the competition in this particular manner. They form mergers with new companies and in turn consume them. Monsanto is also another biotechnological company that employs monopoly in its specific market segment. Diagram 2: monopoly graph Diagram 2 indicates that under monopolistic conditions, profit maximization can be achieved when marginal revenues are equal to marginal costs. Monopolistic competition Monopolistic competition is a type of market segment that involves a many sellers that sell differentiated products (Boland et al 144). In simple terms, it is like a combination of many monopolistic firms in to a single market entity. The market structure is the same but each seller provides somewhat different products. The fact is that all the sellers have slightly different products but they are competing for the same customers (Hall and Lieberman 320). This therefore makes the competition to be stiff. Under monopolistic competition, the following characteristics are exhibited. The first is that each firm under monopolistic competition independently makes their own price decisions. These also include decisions about output and how they tackle the highly competitive market. In monopolistic competition, firms have the right to enter or leave freely the market. The number of buyers is also unlimited. Monopolistic competition uses differentiation as the major factor to set the distance between the competing firms. The differentiation can occur through different levels from the products being provided to the way firm’s service provision. In a nutshell, the levels of differentiation are different. The first loophole involves product differentiation. Products are differentiated using sizes, colors among other variables. The second level of differentiation involves marketing strategies where firms use various forms of marketing. Differentiation can also occur through channels of distribution and human resource differentiation. Electronic devices can provide a good example of products that can be differentiated. In monopolistic competition, the demand curve has a downward slope. This is simply because the firms are responsible for setting their own prices. Firms can decide to set higher prices than equal competitors or a lower price than the competition. Many of the enterprises currently are operating under monopolistic competition. Firms in this particular segment usually have a fierce level of competition. The art of marketing is well displayed in monopolistic competition as firms try to outdo each other through advertisements. Soaps and detergents are also another category of products that exist in monopolistic competition. Diagram 3: monopolistic competition graph Diagram 3 represents monopolistic competition in the short run. Entry of new firms make demand elastic shifting the curve to the left. This will diminish super normal profits. Oligopoly Oligopoly is a market structure that is controlled by a limited small number of firms or sellers. The small numbers of sellers have total control of the market (Hall and Lieberman 327). The actions of one seller have an effect on the other seller. This therefore indicates that decisions made by one seller are based on the actions of the other sellers. In oligopoly, sellers may be selling products that are the same or products that are differentiated but not perfect replacements for each other. Firms under oligopoly manifest different features from the other market segments. The first feature is interdependence where the decisions made by one firm have a direct impact on the decisions made by the other firm. The decisions are therefore made as a group. Firms under oligopoly have to market themselves in order to survive. Unlike monopoly and perfect competition, oligopoly is slightly related to monopolistic competition where stiff competition is witnessed. Advertisement is therefore significant for survival (Hall and Lieberman 343). Another key feature under oligopoly is price rigidity. It is a common characteristic of firms operating under oligopoly market model. When a firm makes price changes, the whole group of sellers also adjusts their prices making prices under oligopoly to be inflexible. The demand curve under oligopoly is therefore indeterminate. Diagram 4: oligopoly graph Diagram 4 represents oligopoly. P indicates the price and Q the output, profit maximization only happens when the two intersect at point A. Economic efficiency under monopoly and perfect competition The cost of production in perfect competition is slightly lower compared to perfect competition. Due to the unrealistic market conditions in perfect competition, companies cannot be able to make supernormal profits in the long run. This will in turn hinder Research and Development which will impact economic development. Under monopoly, economic efficiency is likely to be manifested through technological superiority of monopolistic firms. There are possibilities of price discrimination under monopoly but that aspect can be regulated by the government. Many firms under perfect competition can fail to grow bringing down economic efficiency. Conclusion The article has based its theoretical analysis on the four market segments. Perfect completion as explained is a market condition with many buyers and sellers. Monopoly has a single seller and many buyers. Oligopoly has a small number of firms controlling the market segment while in monopolistic competition, there are many sellers providing related but differentiated products. The article has highlighted the properties of each market segment and how they are currently being manifested in the modern world. The article has also provided a comparison between the four markets especially monopoly and perfect competition. The subject area discussed is wide but the article narrowed down to the basic principles. Works cited Boland, Michael A., et al. "Measuring the benefits to advertising under monopolistic competition." Journal of Agricultural and Resource Economics 37.1 (2012): 144-155.web Hall, Robert E., and Marc Lieberman. Microeconomics: Principles & Applications. 6th ed. Mason, OH: South-Western Cengage Learning, 2013. Print Tremblay, Victor J., and Carol Horton Tremblay. "Perfect Competition and Market Imperfections." New Perspectives on Industrial Organization. Springer New York, 2012. 123-143.print von Stackelberg, Heinrich. "Market Structure and Economic Policy." Market Structure and Equilibrium. Springer Berlin Heidelberg, 2011. 85-94.print Read More