Describe each market structure discussed in the course (perfect competition, monopolistic competition, oligopoly, and monopoly) and discuss two of the market characteristics of each market structure....

Different Market Structures; Problems with Imperfect Competition
Different Market Structures; Problems with Imperfect Competition
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Different Market Structures; Problems with Imperfect Competition
When Adam Smith published his famous book, “An Inquiry into the Nature and causes of
wealth of Nations”, in 1776, average size of the factories was small and business was
competitive. But gradually, different form of market structures came into effect. Economists
classify markets according to the degree of competition, which, in turn, depends on the following
criteria:
a) The nature of the product
) The number of firms in the industry
c) The freedom of entry and exit of firms into and out of the industry
In this paper, we will discuss about the different types of market structure prevailing in an
economy with some real life examples. We will also observe that price elasticity will differ from
market to market. The effect of entry ba
iers on the long run profitability of a firm will also be
discussed along with the competitive pressure that exists in a market with high ba
iers to entry.
Then we will see how each of the markets can be regulated efficiently. The role of the
government and its effect on the pricing structure will be analyzed in
ief. Finally, we will deal
with the effect of international trade on each type of markets.
1) When we examine the type of market structure a business operates within we
categorize markets according to the degree of competition that exists. Based on these, we can
classify market into four
oad categories, namely:
i. Perfect Competition
ii. Monopoly
iii. Oligopoly
Different Market Structures; Problems with Imperfect Competition
iv. Monopolistic Competition
Now, we will discuss each of the markets in
ief.
i. Perfect Competition: Perfect competition is a type of market with many buyers
and sellers and each of them selling a homogeneous product. Two main characteristics of this
market structure are: a) Large number of buyers and sellers, each selling a homogeneous product.
) Each firm is a price taker.
ii. Monopoly: Monopoly refers to the market structure where there is only one single
seller in the entire market, i.e. the firm is the market in this situation. Two main characteristics of
this market structure are: a) There is a single seller in the entire market. b) A monopoly firm has
market power and hence is price setter in the market.
Different Market Structures; Problems with Imperfect Competition
iii. Oligopoly: An oligopoly occurs when a few firms (two to ten) dominate the
market place. An oligopoly market is categorized by degree of concentration. A high degree of
concentration means that a few firms completely dominate the market and vice-versa. Two key
characteristics of an oligopoly market are: a) Mutual interdependence- Mutual interdependence
is said to be present when the actions of one firm have an impact on the other firms in the
industry. b) Repeated interaction- Often the oligopolists within an industry have been competing
with one another for a long time. Hence repeated interaction is required.
iv. Monopolistic Competition: Monopolistic Competition occurs when there are
many buyers and sellers in a market and each produce similar, but slightly differentiated
products. Two main characteristics of this market structure are: a) Unlike perfect competition,
products are not homogeneous. Instead, they are slightly differentiates. b) In spite of having
many sellers, each firm has a certain degree of market power.
Different Market Structures; Problems with Imperfect Competition
2) Consider the market for cars in Los Angeles. There are few car manufacturing
firms in Los Angeles. Hence this is an example of oligopoly market. Mutual interdependence is
one of the main characteristics in the car market. Each firm observes the behaviour of the other
firms and set prices accordingly.
3) In perfect competition there is free entry and exit. Hence there is no entry ba
ier
in case of perfect competition. But, if we consider a monopoly market, then there can be entry
a
iers. Ba
iers to market entry include a number of different factors that restrict the ability of
new competitors to enter and begin operating in a given industry like
a) Government regulation (e.g., Australia Post)
) Control of key resources (e.g., De Beers, Ocean Spray, Compass II)
c) Natural monopolies (e.g., Telstra)
d) Marketing advantages of incumbency
If it’s a natural monopoly case, then the firm enjoys low production cost. Hence the other
firms, who want to enter the market faces a high entry ba
ier. Here the monopoly firm has no
fear of facing competition from other firms in future and enjoy its monopoly power. The firm
Different Market Structures; Problems with Imperfect Competition
can retain its monopoly power and enjoy monopoly profit in the long run. But suppose it is not a
case of natural monopoly. Then the firm has to take some initiative in order to retain its
monopoly power like control of key resources etc. in this case, profitability may decrease.
4) Competitive pressure is the pressure which is felt by other firms who try to
compete against a particular firm. A group of small primary ba
iers may constitute a significant
entry ba
ier. Firms may adopt predatory pricing policies by lowering prices to a level that would
force any new entrants to operate at a loss Bain argued that scale economies are an entry ba
ier.
Incumbents may have already built plants of efficient scale. Capital requirements are not
economic entry ba
iers, since incumbents had to bear capital costs in the past similar in size to
those that entrants have to bear today.
5) Price elasticity measures the responsiveness of demand due to a price change. It
can be defined as the percentage change in quantity demanded due to one percent change in the
price of the commodity.
i.e. Price elasticity of demand (e) = (ΔQ / ΔP) × (P / Q)
Price elasticity takes different names depending on the value of the price elasticity:
 If e = 0, then demand is said to be perfectly inelastic; i.e. demand doesn’t change
at all with change in price.
 If e = 1, then demand is said to be unitary elastic; i.e. the percentage change in
demand is exact the same as percentage change in price.
 If e ˂ 1, demand is said to be inelastic.
 If e > 1, demand is elastic. E.g. luxury goods.
Now, price elasticity varies from market to market. In case of a perfectly competitive
market, the demand curve for the output is perfectly elastic at a given market price. An
Different Market Structures; Problems with Imperfect Competition
individual firm cannot influence the market price....