Monopoly and Oligopoly
Monopoly and Oligopoly
There are different market structures in economics based on the characteristics of the market. They are determined by the number of sellers and buyers, the nature of the product, conditions of entry and exit, as well as economies of scale. The market structure influences the pricing of a product and the supply of commodities. The basic characteristics of the different types of market structures are given below.
Pure competition-There is a number of firms having insignificant market share. The firms produce homogeneous products which are perfect substitutes .They have the freedom to enter and exit from the market. Each firm is independent and their actions do not affect the price of the product. The market demand and supply determines the commodity price, hence the firms are price takers. (The Economic Times 2015).In reality such markets does not exist.
Monopoly-In this market structure there is only one firm which produces goods that does not have a close substitute. The entry of additional firms is restricted hence a single firm comprises the whole industry. The buyers have limited choice and the firm enjoys maximum profit.
Monopolistic competition-There is more number of firms with differentiated products. The entry and exit is easy for firms under this market structure. There are many buyers and few sellers. Selling costs for advertisements and other promotional activities are incurred due to the competitive nature of the products sold. Oligopoly-This has a few sellers with differentiated or standardized products. The entry and exit of firms is not easy. Pricing and output decisions are mutually dependent. Non price competition like customer care exists between the firms (McConnell and Brue, 2004).
A Kansas wheat farm comes under perfect competition as a number of farm exists .The product is identical and the rise and fall of price depend on the demand and supply at the market.
The steel industry can be classified under oligopoly as there are only a few firms in steel production .The products are standardized and since due to the large size of the firm new entries are difficult.
The Jolly Green Giant Peas has a monopolistic market structure as there are many firms selling identical products under different brands. Advertisements and promotions create brand awareness which increases the sales.
The automotive industry comes under oligopoly as there are few firms with differentiated products. As firms are large new entry is difficult. Importing some product causes competition. More of non-price competition as firms spends more for advertisements and creating awareness.
Externalities are the impact of production or consumption on people who are not involved in the transaction. They can be positive when the effect is beneficial and negative when it causes harm. Cleaning services offered by Government and private firms is a positive externality. Demolition of buildings can cause a negative impact on the people living around the area as it makes the air dusty and polluted. Some of the goods when produced cause pollution and the cost of cleaning is incurred by the society. The government can control such negative externalities by taxing pollution causing goods, thereby increasing the cost of production. As the cost increases there will be a reduction in the number of goods produced which in turn will reduce pollution.
THE ECONOMIC TIMES. (2015) Perfect competition .Retrieved
McConnell, C. and Brue, S. (2004).Economics: principles, problems and policies 16 edition.