In the final posting of my blog, I would like to summarize the differences between the four market structures. Technically speaking, there are only three as perfect competition does not exist and is just the benchmark in which to compare the other types of market structures to. In an ideal world, everything would be in perfect competition. Perhaps one day it will exist, but I think that would require a lot of government intervention and would make a lot of very powerful people (oil tycoons etc.), extremely angry.
Below is a table which outlines the most important differences between the four:
Perfect Competition
|
Monopolistic Competition
|
Oligopoly
|
Monopoly
| |
Number of Firms
|
Infinite
|
Many
|
Few
|
One
|
Freedom of Entry
|
Easy
|
Relatively easy, few restrictions
|
Difficult
|
Nearly impossible
|
Nature of Product
|
Undifferentiated
|
Differentiated
|
Undifferentiated or Differentiated
|
Unique
|
Implications of Demand Curve
|
Horizontal
Perfectly elastic
|
Downward sloping although relatively elastic
|
Downward sloping although relatively inelastic
|
Downward sloping, very inelastic
|
Average Size of Firms
|
Small
|
Small-medium
|
Large
|
Extremely Large
|
Possible Consumer Demand
|
No preferences
Many choices
|
Some preference
Many choices
|
Few choices with some preferences.
Higher prices when producers in collusion
|
1 choice
High demand
Lower supply
|
Profit Making Possibility
|
Normal profits
|
Normal profits
|
Normal profits in short run, possible economic profits in long run
|
Economic profits
|
Government Intervention
|
None
|
Some restrictions
Taxes
|
Taxes
Price Caps
Subsidies
|
Technical (resource ownership),
Legal (patents, franchising)
|
Control Over Price
|
Some
|
Some
|
Significant Control
|
“Price Makers”
Lots of control
|
If there's one thing I've learned in this economics class, you just can't have enough graphs! So, below we will take a look at the four different market structures along with a representation of the demand curve that would occur in each.
Perfect Competition:
In a perfectly competitive market, you will notice that the demand curve is horizontal or perfectly elastic. This means that consumers will purchase unlimited product at the price that is taken by the producers. Consumers will not purchase the same product at any other price, no matter how much the supply may change. The demand curve remains constant and will experience no fluctuations no matter what happens. The marginal revenue and average revenue also remain constant in this type of market because they are equal to the demand curve.
Monopolistic Competition:
Source: http://www.economicsonline.co.uk |
Source: http://www.economicsonline.co.uk |
In the long run, the demand and AR curves have shifted to do more competition entering into the market. The firm, according to this graph is no longer achieving economic profits because the AR curve has come down to be level with the point where MR and MC curves intersect.
Oligopoly
Point A on the demand curve illustrates the best price to sell at and the best quantity to produce because the price must drop quite drastically to in order to sell more, but revenues will also decline at that point, hence the completely vertical marginal revenue curve. The drop indicates that revenue will not increase at all with the sale of more product for a significant period.
Monopoly:
In monopolistic competition, one large dominates the entire market which makes gives the firm the ability to decide the cost at which they will sell and the optimal amount of output in order to generate the highest revenues with the lowest costs. Point A illustrates the price and quantity at which this goal would be achieved. Monopolies must take into consideration that consumers may not purchase their product at all if they attempt to charge an exorbitant price or they may start to develop alternative products to use instead.