The institutional affiliation
The four major market structures in the modern economic world are: perfect competition, monopoly, oligopoly, and monopolistic competition. Each one has strengths and weaknesses, opportunities and threats, so let us take a closer look at them.
Perfect completion is also called pure competition and is a benchmark where competition exists at its best level. Perfectly competitive market has large number of participants and none of them is large enough to influence the product price or its quality. In other words, there are so many sellers that neither price nor quality varies significantly. Pure competition market is easy to enter and exit and if market conditions change it is easy to make adjustments in terms of factors of production. Perfect competition is also characterized by available information flows, free exchange of goods; conditions which allow selling a product at the point where the most profit is generated and short run economic profit. Government very rarely regulates such markets. There is usually also no need to run huge advertisement campaigns since information is available to all participants. Despite of the fact that perfect competition would be the most useful for society it is rather unrealistic which means that not many markets nowadays are purely competitive. According to Milton Friedman (1953), perfect completion is theoretical: “Just as we've never seen that line there has never been truly free enterprise.” Nevertheless, vendors selling fruits or vegetables, for example, represent perfect competition. Vendors at Alabama Farmers Market grow and sell both fruits and vegetables. The demand curve in such market is elastic, vendors receive economic profit on the short run, there are no barriers to enter or exit the market, and vendor can start participating or leave the market at any time with no costs.
Monopoly market structure is totally opposite to perfect competition and takes a place when a single manufacturer provides a particular product or service and control more than 25% of a market. There are no competitors and no substitutes. Therefore, the monopolist can raise prices, however there are bunch of laws that control a dominant business. Same as perfect competition, monopoly maximizes profits but it can be established by a government and no other participants can enter (or even exit) the market. There are different types of barriers which prevent them from doing it, economic, legal and deliberate are the main ones. There is no difference between monopoly and perfect competition in terms of cost since both structures minimize it. Unlike perfect competition, monopoly’s demand curve is inelastic and it can have abnormal profit in the long run. Monopolistic market also does not offer a wide range of choice to customers and can charge them higher prices comparing to the competitive market. Google is a real life monopoly. According to Peter Thiel (2013), “it owns 67% of the global search market, less than 3% of the global advertizing market and less than 0.24% of the global consumer tech market.” Google is a search engine, it earns profit in the long term run and its demand curve is inelastic. If another company will decide to compete in the following industry it will definitely face economic and other barriers.
Oligopoly market structure exists when few companies dominate a market. They usually communicate with each other and cannot act independently since decisions of one participant can influence another. In some cases there might be informal market leader than sets prices, in other industries competition is very harsh and the more firms are presented on the market the better competition is. Same as previous markets, oligopoly maximizes profits. Unlike competition but same as monopoly, oligopoly allows gaining abnormal profit on the long run. Customers do not have access to much information about cost and quality. It is rather difficult to draw clear oligopoly model since it can include two or ten companies which makes each oligopoly different. It is problematic to enter oligopolistic market. Oligopolistic structure is also characterized by non price competition which means that firms compete rather in product differentiation than prices. Examples of oligopoly are cell phone companies, in particular, Verizon. Verizon sells different kinds of phones, accessories and plans and provides support to the customers. The company receives economic profit. Despite the facts that under imperfect competition demand curve usually has equilibrium point, Verizon’s demand curve is rather inelastic because it provides good quality products and change in price won’t change the demand significantly. There are barriers to enter the market, in particular, costs, competitors, lack of consumer demand, etc.
Monopolistic competition differs from perfect competition because products offered by many sellers are differentiated. They can be of a different quality and cost therefore cannot be substitutes. Same as in perfect completion, monopolistic competition is characterized by many sellers and buyers, no market leaders, almost no barriers to enter and exit the market. In contrast to monopoly and oligopoly, monopolistic competition structure doesn’t allow earning profit in the long run. Same as in oligopolistic structure, the following market structure is also characterized by non price competition, product differentiation, lack of information. Perfect competition has many advantages over monopolistic one; it is less desirable for society since it can push for unemployment and keeps inefficient firms functioning. Customers also spend more money because monopolistic competition encourages brand names and advertisement. Nike is a good example of monopolistic competition since there are other brands that sell the same product but its quality and appearance are different. Nike sells sport shoes and clothing, earns profit in the short run, its demand curve is rather inelastic. Also, there are almost no barriers which can prevent from entering the industry.
References:
Charlie, S. (2013). Perfect competition examples. Buzzle. Inteligent life on the Web. Retrieved from http://www.buzzle.com/articles/perfect-competition-examples.html
Baer, D. (2014). Peter Thiel: Google has insane perks because it is a monopoly. Business Insider. Retrieved from http://www.businessinsider.com/peter-thiel-google-monopoly-2014-9
Shubik, M. (1959). Strategy and market structure: competition, oligopoly, and the theory of games. San Francisco: John Wiley and Sons.
