Market in general refers to a place where there are different sized shops with large and small sellers selling different types of goods. However, while consider in terms of economics market definition is not limited to any particular place. It is not always required for the parties to come in physical contact. Henceforth, in economics the concept of market is used in a specialized and typical sense. It is not confined to a fixed location. The four main types of market are perfect competition, monopoly, monopolistic competition and oligopoly. Each has their own features. The paper briefly describes each of these market structures with reference to real life examples. Depending on respective features, some markets are favorable for sellers while some are preferable for buyers. Market differs in terms of elasticity of products sold in the market, profitability in the market and other aspects as well.
Perfect competition is a market structure where numerous buyers and sellers are selling a homogenous product. Followings are the main features of perfectly market. There is large number of buyers and sellers in the marketplace. The sellers in the market sold an identical or homogenous product. Any new firms can freely enter the market and existing sellers can leave the industry if found it unprofitable (Frank, 2014). The participants have perfect set of information and possess complete knowledge about the market. All the factor of production are perfectly mobile.
Due to the presence of large number of buyers and sellers in the market, it is not possible for any single buyers or sellers to influence price or quantity. Hence, firms are price takers in the market. The demand curve faced by the firms is perfectly elastic in nature and is a horizontal straight line. Because of fixed price, average revenue equals marginal revenue and both equals price. The cost curves are of usual shape. Profit maximization in the short run requires marginal revenue and marginal cost equals. In the short run, it is possible for competitive firms to enjoy either abnormal profit, normal profit or loss (Fine, 2016). In the long run, the competitive firms end up with only a normal profit. The firms in the long run operate at the minimum point of long run average cost earning only normal profit.
The perfectly competitive market structure an extreme hypothetical situation. Food and beverages industry resembles to perfectly competitive industry. In various industries, producers have many firms competing with similar products (Baumol & Blinder, 2015). The market for agricultural product is often take as an example of competitive industry.
Monopoly in a market where single seller supplies the entire market. There is no close substitute of the product sold by the monopolist. Being the single seller the monopolists devices complete control over price and quantity. There are strong entry barriers in the market. As the monopolists determine price and quantity on its own, the demand curve is downward sloping unlike competitive firms that face a perfectly elastic demand curve. The equilibrium in the market is determined from usual profit maximization condition (Moulin, 2014). The monopolist is able to maintain a above normal profit both in the short run and in the long run. Prices charged in monopoly market is greater than the price obtained in competitive market while the equilibrium output in monopoly is less than competitive output. An example of pure monopoly market in United States is United States Postal Service.
As the name suggests, monopolistic competition is a combination of perfect competition and monopoly market and has characteristics of both the market. The firm in the monopolistic competitive market sells a more or less similar product. The product is same in their basic characteristics. Each seller differentiate its product by adding a different brand name, making the package different or adding some features. Competition exists among the sellers. Each seller can take their decision regarding their own brand and hence has a monopoly (Currie, Peel & Peters, 2016). The products sold in such market has a number of close substitute reducing the market power of firms. In the short run, like competitive firms, they can enjoy abnormal profit, loss or normal profit but in the long run there is only normal profit in the industry. For example, restaurants and professional services.
Oligopoly is a form of imperfectly competitive market with dominance of a few sellers. If the few sellers sell homogenous product then it is called pure oligopoly. In a differentiated oligopoly, firms sell a differentiated product (Kolmar, 2017). For examples- The four dominating manufactures in the primary breakfast cereals are Kellogg, General Mil, Post and Quaker forming oligopoly in the market.
In the competitive market, there are nor barriers to entry and exits. New firms when find a market profitable enter in the market. In times of economic loss, firms leave industry. The free entry and exit mechanism in the competitive industry reduces any abnormal profit or loss in the long run resulting only in a normal profit (Rader, 2014).
Suppose, the competitive firm enjoys a short run profit by charging a price P and selling quantity q. The profit enjoyed by this firm attracts other firms to join the industry. When new firms join the industry, total quantity supplied in the industry increases. As a result, the industry supply curve will shift to the right reducing price in market. The low price reduces profit and new firms stop entering (McKenzie & Lee, 2016). This happens at the minimum point long run average cost. Competitive price in the long-run always equals minimum average cost. The minimum point of average cost indicates productively efficient point. Therefore, firms in the competitive industry.
In the competitive industry, firms even suffering from loss continue their operation up to a certain point. Loss is incurred once total revenue fall short of total cost. After incurring loss, firm continue to operate in the market as long as some part of the fixed is recovered. At price equals minimum point of average cost normal profit (Bernanke, Antonovics & Frank, 2015). This is known as break-even point. Below this point, firms continue production until the minimum point of average variable cost. For price even below minimum average variable cost, the loss making firms stop producing. This is the shut-down point.
As like perfect competition, in the monopolistically competitive market there are almost no barriers or lower barriers to entry. In monopolistic competition, firms in the short run can enjoy a supernormal profit. The profit prospect in the industry attracts new firms. The entry of new firms make firms make the demand more elastic (Friedman, 2017). New firms continue to enter in the market unless profit reduce to only a normal profit. Therefore, both competitive firms and monopolistically competitive firms enjoy only normal profit in the long run. However, there is a different in market outcome. Under, monopolistic competition firms do not continue operation until the minimum point of operation. The long run equilibrium point is determined from the tangency between the demand curve and average cost curve. Firms enjoy a greater cost efficiency as they operate at the falling part of average cost indicating an increasing return to scale. Monopolistically competitive firms hold an excess capacity.
In the monopoly market, the single firm enjoys a profit throughout the entire phase of operation. The high entry barriers in the market helps to retain profit of the singe firm (Elsner, Heinrich & Schwardt, 2014).
When a monopoly firm enjoy above normal profit in the short run, the new firms cannot enter in the market. The high entry barriers allow the firms to charge a price above average cost and enjoy a significant amount of profit. The shaded region in the figure shows long run profit because of high entry barriers.
A few large firms dominate the oligopoly market. High concentration of market share in the hands of few large firms works as natural entry barrier. Stronger the entry barriers it is more difficult for new firms to enter the market (Cowen & Tabarrok, 2015). With very restrictive entry, the oligopoly structure can take a monopoly structure if one firm dominates all others in the industry. This takes firms closer to a point where it can enjoy an abnormal profit with standard profit maximization.
In any form of imperfectly competitive market, firms try to make their product as much different as possible from its competitors. In the monopoly, market presence of no close substitutes help to retain the monopoly power and maintain a high profit. Entrepreneurs always has incentives to develop a close substitute of the product sold under monopoly and enjoy a considerable marker power. For perfectly competitive and monopolistically competitive market, several close substitutes are already present in the market and hence firms have no incentive to substitutes (Arrow, 2015).
Objective of the seller is to maximize profit. For a seller, the market that comes with higher profit prospects is more attractive. In this sense, the monopoly market is more preferable for selling products. In the monopoly market, the single seller enjoys all the market power. Firms not only enjoy abnormal profit in the short run but also retain it in the long-run. The choice of market new after monopoly is the oligopoly market. In the two other form of market though firm can earn some profit in the short run but in the long run, there is only normal profit.
For a buyer, perfectly competitive market is the most preferable market. Competitive market has both productive and allocative efficiency. Price always equal marginal production cost. A socially efficient output is produced and buyers are able to receive socially efficient output at socially efficient price. In any form of imperfectly competitive market, sellers have some extent of market power (Hill & Schiller, 2015). Using the market power, sellers maximize their profit as much as possible reducing surplus to the buyers.
In a competitive market, every seller sell a homogenous or identical product. Firms face a perfectly elastic demand curve. When one firms charge a high price, then buyers will not come to this firm and shift their demand. A slight change in the price of the product changes its demand largely. In monopolistic competition, as more and more firms enter the market the demand for each firm become more elastic. In the oligopoly market, the market demand curve is kinked shaped. In one part of the demand curve demand is elastic in nature while in other the demand curve is inelastic (Dean, 2014). The firms in the oligopoly market, involve in a price war in the elastic part of the demand curve.
In the competitive market, the market alone performs efficiently. There are no role of government in the market. Although monopoly market is not socially desirable, however there are situations in which government itself encourages the presence of a single seller in the market. These are natural monopoly market. Public utilities, railway are some natural monopoly market. In a monopolistic market, government can put regulation to reduce to protect the interest of buyers. Price ceiling and price floors are some policy that government can use to control price.
International trade by opening new market avenues affects different market structure. With perfect competition, trade expands competition and offers consumers a variety of goods to choose. In a monopolist competitive market, international trade ensures a good quality of the differentiated product. For oligopoly market, international trade comes with the effect of increasing competition within the market and hence reduces price (Maurice & Thomas, 2015). Trade in a monopoly market reduces distortion as new firms enter with huge capital investment.
Conclusion
Market in economics indicates an arrangement where selling and buying parties come in contact to each other either directly or indirectly and exchange goods. The paper discusses different market structure. In different market, the level of competition is different. High entry barriers ensures a high profit. For seller, a monopoly market is always preferred while for buyers competitive market is preferable. The need for government intervention is least in the competitive market. For imperfect competition, government has some role to reduce distortion arises from these markets. Finally, internationally trade through increasing access to a wider market affect each of the primary market structure.
References
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Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learning.
Bernanke, B., Antonovics, K., & Frank, R. (2015). Principles of macroeconomics. McGraw-Hill Higher Education.
Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave Macmillan.
Currie, D., Peel, D., & Peters, W. (Eds.). (2016). Microeconomic Analysis (Routledge Revivals): Essays in Microeconomics and Economic Development. Routledge.
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Elsner, W., Heinrich, T., & Schwardt, H. (2014). The microeconomics of complex economies: Evolutionary, institutional, neoclassical, and complexity perspectives. Academic Press.
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