Comparing Market Structures

Welcome to the final blog entry. In this entry we will be looking at four different types of competitive markets: perfect competition, monopolistic competition, monopoly and oligopoly. Below is a table that shows the differences between four markets. We will then explore each market individually by a brief description of how they work and then look at them further by looking at some graphs.

	Perfect Competition	Monopolistic Competition	Monopoly	Oligopoly
Number of Firms	Infinite	Many	One	Few
Freedom of Entry	Easy	Easy	Very Difficult	Difficult
Nature of Product	Identical	Similar	Unique	Identical or Similar
Implications for Demand Curve	Horizontal/Highly Elastic	Downward Sloping/Elastic	Downward Sloping/Inelastic	Downward Sloping/Inelastic/Kinked
Average Size of Firms	Infinite Small	Many Small/Medium	One Large	A Few Large
Possible Consumer Demand	High Elasticity	Elastic	Inelastic	Inelastic/Kinked
Profit Making Possibility	Normal Profit	Normal Profit	Economic Profit	Normal, Maybe Economic  Profit
Government Intervention	No  Regulation	Slight Regulation	Heavy Regulation	No Regulation
Efficiency	Yes	No	No	No
Example	Wheat	Restaurants	Cable Company	Oil and Gas

Perfect Competition

In a perfect competition, there are a large number of sellers and buyers. If a seller enters or exits the market, then there is no effect on equilibrium. The price of goods is stable. Prices are determined by the market as opposed to the producers. As we can see in the graph below the price is equal to the marginal cost. This means that not only is the price constant, but so is the efficiency. This produces constant normal profits.

Monopolistic Competition

Below are two graphs. These graphs show monopolistic competition in the short run and in the long run. The major difference between the two graphs is that in the short run, there is an economic profit where in the long run, there is only normal profit. The reason for this is in the short run, the price is higher than the average cost and in the long run, the price is equal to the average cost. Monopolistic competitors produce similar but not identical products. The differences are small such as brand name, features or simply packaging. This makes products for sale substitute products.  Productive efficiency is not achieved because the price is above the lowest point of the average cost curve. Monopolistic competition is does not meet allocative efficiency because the price is above the marginal cost curve.

 

Monopoly

A monopoly contains a single firm with a unique product. Freedom of entry into a monopoly is extremely difficult. Monopolies are heavily regulated by the government; in particular their prices. In the graph below we see that monopolies make economic profits because firms operate above cost. We also see at price level  (P2) that demand (average revenue) meets the average cost. This is known as the fair return price. P3 shows us the price where marginal cost meets demand. This is the socially optimum price which is the price that produces the best allocation of products from the point of view of society (Morris, 2009).

Oligopoly

An oligopoly contains a few firms selling identical or similar products. As we see in the graph there is a kink in the curve. D1 is elastic and D2 is inelastic. Again, this market is inefficient because the price is higher than the marginal cost. The point between B and C is the area where the demand does not change. In an oligopoly, firms can come together and control the market prices. This is known as a cartel. There is no government regulation here.

 

Morris, A. J. (2009). Principles of Microeconomics 6 Edition. Toronto: McGraw-Hill Ryerson.