Models of competition
- Perfect competition: characterized by a large number of small, independent firms and a homogeneous product.
- Monopolistic competition: characterized by a relatively large number of independent firms that sell differentiated products that are not perfect substitutes.
- Oligopoly: characterized by a small number of large firms that dominate the market and may collude to restrict output and raise prices.
- Monopoly: characterized by a single firm that controls the entire market and has significant barriers to entry.
Another way to classify competition is based on the degree of information availability in the market.
- Perfect competition: characterized by perfect information availability
- Imperfect competition: characterized by imperfect information availability
Perfect competition is a market structure in which a large number of small, independent firms produce and sell a homogeneous product. In a perfect competition market, there are no barriers to entry or exit, and all firms have access to the same technology and resources.
Some features of perfect competition include:
- A large number of small, independent businesses and a large number of buyers
- A homogeneous product for all sellers
- The price is set by market forces, shaped by changes in demand and supply
- Free flow of capital between different industries
- Lack of non-price competition
- Perfect information availability
In a perfect competition market, firms are price takers, meaning that they cannot influence the market price and must accept the price determined by supply and demand. They also have no advantage over other firms in terms of cost or technology. As a result, firms in a perfect competition market will earn only normal profits in the long run.
It should be noted that perfect competition is a theoretical model and it is very rare to find it in the real world. However, it serves as a benchmark to compare real-world markets to.
Monopolistic competition is a market structure in which a relatively large number of independent firms sell products that are similar, but not perfect substitutes. This means that while there are many firms in the market, each firm's product is slightly different from the others, creating some degree of product differentiation.
Some features of monopolistic competition include:
- A relatively large number of independent firms
- Product differentiation, with firms selling similar but not identical products
- Some degree of control over price, with firms able to charge slightly different prices for their products
- Active non-price competition, such as advertising and branding, to differentiate products and attract customers
- Barriers to entry that are not too high, allowing new firms to enter the market
- Imperfect information availability
In a monopolistic competition market, firms have some degree of market power, meaning that they can influence the price of their product to some extent. This allows firms to earn economic profits in the short run, but in the long run, the economic profits will tend towards zero as new firms enter the market and competition increases.
Examples of monopolistic competition markets include retail, restaurant, and service industries.
An oligopoly is a market structure in which a small number of firms dominate the market. These firms may collude with each other to set prices and restrict output, leading to reduced competition. Examples of oligopolies include industries such as oil, telecommunications, and pharmaceuticals. Features of the model of oligopoly:
- A small number of large firms dominate the market
- Interdependence among firms - each firm's actions will affect the other firms
- Barriers to entry are high, making it difficult for new firms to enter the market
- Possible use of non-price competition such as advertising and product differentiation
- Possibility of collusion among firms to restrict output and raise prices.
A monopoly is a market structure in which there is only one firm that controls the entire market and has significant barriers to entry, making it difficult or impossible for new firms to enter. The firm is the sole producer of a product or service, and has complete control over the price and output.
Some features of monopoly include:
- A single firm that controls the entire market
- Significant barriers to entry, such as patents, economies of scale, or government regulation
- The ability to set prices and output levels without competition
- The ability to earn economic profits in the long run
- Limited or no non-price competition, as there are no other firms to compete with
- Imperfect information availability
In a monopoly market, the firm is a price maker, meaning that it can influence the market price and does not have to accept the price determined by supply and demand. This allows the firm to earn economic profits in the long run. However, monopolies can also lead to inefficiencies and higher prices for consumers, which is why governments often regulate or break them up.
Examples of monopoly markets include utility companies with exclusive rights to provide services like water or electricity, and companies that hold patents on certain products.
|Competition — recommended articles|
|Market structure — Monopoly — Free competition — Oligopoly — Price taker — Price-Taker — Price — Price Maker — Monopson|
- Robinson, J. (1933). The economics of imperfect competition.