Comparing Market Structures in Economics

Posted on May 1, 2025 in Economy

Perfect Competition

Sellers: Numerous sellers, none of which can significantly influence market prices.
Product: Homogeneous products with no differences among them from the consumer’s perspective.
Price: Determined by the market, reflecting supply and demand; sellers are price takers.
MR (Marginal Revenue): Equal to the market price, as each additional unit sold at the market price adds equally to total revenue.
Curves: Includes demand and supply curves; the demand curve is perfectly elastic, reflecting constant price.
Elasticity: Price elasticity of demand is infinite; consumers have perfect substitutes if the price rises.
Promotion: Minimal to none, as products are homogeneous and well-known.
Long Run: New firms can enter the market freely, profits tend to normal levels due to free entry and exit.
Barriers to Entry/Exit: Virtually non-existent, allowing free movement of firms into and out of the market.
Shutdown Decision: Firms consider shutting down if the market price falls below the minimum average variable cost, where it’s better to stop production temporarily.

Sellers: A single seller dominates the entire market.
Product: Unique, with no close substitutes.
Price: Price maker, with the ability to set prices above marginal costs due to lack of competition.
MR: Less than the price, leading to a downward-sloping demand curve for the monopolist’s product.
Curves: Demand curve for the monopolist is the market demand curve, which is downward sloping.
Elasticity: Price elasticity of demand is lower; fewer substitutes mean consumers are less responsive to price changes.
Promotion: May be significant, particularly if aiming to increase demand or create brand loyalty.
Long Run: Barriers to entry protect the monopolist from new entrants, preserving abnormal profits.
Barriers to Entry/Exit: High, often due to legal restrictions, control of key resources, or technological superiority.
Natural Monopoly: Occurs where a single firm can supply a product to an entire market at a lower cost than two or more firms, typically due to economies of scale.
Deadweight Loss: Economic inefficiency resulting from the monopolist setting prices above marginal costs.
Instruments to Regulate/Control Monopoly: Include price caps, anti-trust laws, and regulatory oversight to prevent abuse of monopoly power.

Sellers: Many firms competing.
Product: Differentiated; each firm offers a product that, while similar to others, is not identical.
Price: Each firm has some power to set prices due to product differentiation.
MR: Downward sloping; each firm faces a downward-sloping demand curve for its own product.
Curves: Each firm’s demand curve is downward sloping, more elastic than monopoly, less elastic than perfect competition.
Elasticity: Relatively high due to close substitutes, but not as high as in perfect competition.
Promotion: Significant, as firms seek to differentiate their products and attract consumers.
Long Run: Entry and exit of firms erode profits to normal levels.
Barriers to Entry/Exit: Low, facilitating the free entry and exit of firms, leading to zero economic profit in the long run.
Herfindahl Index: A measure of market concentration, calculated as the sum of the squares of the market shares of all firms in the industry, indicating the degree of competition versus concentration.