Comparing Market Structures

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

The graph to the left represents a monopolistically competitive market in the short run. Maximum revenue is achieved at the point where MR and MC curves intersect (point A). In the short run, the graph shows that the firm is making economic profits which is represented by the box in between points A, B, C and P.



   

 

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 



 

The most noticeable feature in this graph is that the demand curve has a kink in it and that a portion of the marginal revenue line is completely vertical.

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.