In any economy, operation of any firm is triggered by competitive atmosphere in which firms needs to operate. Their operation is exposed to various factors such as production of goods, cost of goods, marketing, cost of logistics and existing number of competitors etc. Market is a place where existing number of buyers and sellers determine the price of goods. The prices of goods vary depending upon the demand and availability of goods. In economics, type of market structure depends upon mainly three elements as suggested by economists:
Existing number of sellers and size of their company
Conditions of entry to the market. Market is easily accessible or not
Products offered by various sellers are similar or different
The market can be classified in four major types: monopoly, oligopoly, monopolistic competition and perfect competition. Monopoly and perfect competition depicts two extreme markets. In monopoly only seller exists whereas in perfect competition infinite small sellers sell similar products. Oligopoly has few number of big size firms whereas in monopolistic competition multiple small firms produce comparatively different goods.
All four Market structures can be plot on a band in following manner:
Description of Market Structure
The main characteristics of monopoly are: single company operates in the selected commodity with no close alternate available for its products. Due to some reasons entry to the market is not allowed for competitive companies. Existence of monopoly is very rare because many of the company face rivalry from substitute products. The company operate in monopoly decides about the prices of goods and maximize its profit.
Causes for Monopoly:
Legal barriers: if a company is given exclusive rights of production and selling of any specific commodity leads to monopoly. Property rights allow a company to control the raw material needed for production of specific commodity.
Economic Barriers: if production of goods required huge investment which is possible only for few large companies can lead to monopoly. Products which require large scale production to earn any profit and to serve all population at lesser average cost. Electricity, water are few examples of monopoly. Monopoly helps in controlling few resources that are critical for production of any commodity.
Government Created Barriers: if government intensely gives license to only single operator to sell its commodity in a market causes for monopoly.
Monopolist’s Supply and Price Decision:
In monopoly company has power to decide its own price to achieve the quantity of sell. Monopolists decide their own position on demand curve. In monopoly the demand curve is always downward slopping hence a slight increase in price will result in loss of customers without impacting the demanded quantity. For profit maximization monopolists compare their marginal revenue with marginal cost. They always put marginal revenue below demand curve. If demand is decreasing marginal revenue is less than price. For example:
The main characteristics of monopoly are: existence of few big companies. Entry to the market is restricted for new entrants. Entry barriers are almost similar as monopoly. The products offered by companies are differentiated. The companies existing in the market are interdependent because any action taken by a company can affect the market conditions. In this market structure companies maximize their profits when marginal revenue and costs are equal. In America majority of the crude oil and automobile companies operate in oligopoly.
A. Decrease in price → others pursue → revenue decrease → inelastic demand
B. Increase in price → others don’t pursue → revenue decrease → elastic demand
In oligopoly companies does not create price base competition in order to gain maximum profit. Demand curve use to be downward slopping because price increase by one company does not copied by other companies.
The main characteristics of monopolistic competition are: existence of multiple small companies. Entry barriers are very negligible. Power of companies to control the prices is comparatively less due to little difference in offered products. Companies can increase or decrease its prices without losing huge customers or getting into price war respectively.
Demand curve in monopolistic competition is very elastic and downward slopping. In short-run companies maximize their revenues when marginal revenue and cost is equal. Price of goods are based on average revenue. In long-run due to increased competition demand curve noticed a shift. Company price their products equal to average cost with no economic profit.
The main characteristics of perfect competition are: in market infinite number of customers and companies exist. Entry to the market is barrier free. Products available in market are homogenous hence responsible for elastic demand curve. Customer and buyer both have complete information about available products and their prices. Companies price their product where marginal cost and revenue are equal to maximize profit.
In perfect competition, companies perform their operation at very little or zero economical profit. In short-run companies make a little profit because imperfect information and lesser number of companies selling same or homogenous products. In long-run the numbers of competitors increase and companies also have perfect information. This condition causes for downward shift in demand curve for all companies. To sustain in this scenario company reduce prices of goods and make it equal to average and marginal revenue. In long-run companies make no profit.
Perfect competition is most desirable market structure because it provides full value to the consumers. Monopoly is most undesirable structure because it gives full control to the seller to decide upon price and quantity. Seller decrease prices of goods to increase the quantity of sales. This leads to price discrimination and multiple buyers end up purchasing same thing at different prices. In monopolistic competition the products are more or less similar hence companies spend huge amount on advertisement and branding. All the advertisement cost is finally goes from the pocket of consumers. Cost for regulating product prices is another major concern of monopolistic competition. In oligopoly price control is completely in the hands of companies. High entry barriers also give more space to operators to extract extra money from consumers.