Market Structures: Competition, Monopoly, and Monopolistic Forms

Posted on Aug 19, 2025 in Economics

Perfect Competition: Characteristics & Output

Characteristics of Perfect Competition

  • Many Buyers and Sellers: No single firm or consumer can influence the market price.
  • Homogeneous Products: All firms sell identical goods, making them perfect substitutes.
  • Free Entry and Exit: No barriers prevent firms from entering or exiting the market.
  • Perfect Information: Buyers and sellers have full knowledge of prices and product quality.
  • Price Takers: Firms accept the market price determined by industry supply and demand.

Output Determination

  • Short Run Analysis

    • Firms maximize profit by producing where Marginal Cost (MC) = Marginal Revenue (MR).
    • Since MR = Price (P) in perfect competition, the equilibrium condition is MC = P.
    • If P > Average Total Cost (ATC), firms earn supernormal profits.
    • If P < ATC but > Average Variable Cost (AVC), firms operate at a loss but continue production.
    • If P < AVC, firms shut down.

  • Long Run Analysis

    • Supernormal profits attract new entrants, increasing supply and lowering prices.
    • Losses force firms to exit, reducing supply and raising prices.
    • In equilibrium, firms earn normal profits (P = ATC), producing at the minimum point of the ATC curve (productive efficiency).

Monopoly: Defining Features & Output Strategy

Characteristics of Monopoly

  • Single Seller: One firm dominates the market with no close competitors.
  • No Substitutes: The product is unique, with no alternatives.
  • High Barriers to Entry: Legal, technological, or resource-based barriers prevent competition.
  • Price Maker: The monopolist sets prices by controlling output.
  • Downward-Sloping Demand Curve: The firm faces the entire market demand curve.

Output Determination

  • Profit Maximization

    • The monopolist produces where MC = MR.
    • Unlike perfect competition, MR < Price because lowering prices to sell more units reduces revenue on all previous units.
    • The price is set using the demand curve at the profit-maximizing quantity.

  • Economic Profits

    • Monopolists often earn supernormal profits in the long run due to barriers to entry.
    • No incentive to produce at minimum ATC, leading to productive inefficiency.

Example: Utilities like electricity providers (regulated monopolies).

Monopolistic Competition: Traits & Equilibrium

Characteristics of Monopolistic Competition

  • Many Firms: Numerous sellers compete with differentiated products (e.g., restaurants, clothing brands).
  • Product Differentiation: Goods are similar but not identical, achieved through branding, quality, or marketing.
  • Free Entry and Exit: Low barriers allow new firms to enter if profits exist.
  • Some Price Control: Firms have limited power to set prices due to differentiation.

Output Determination

  • Short Run Dynamics

    • Firms maximize profit where MC = MR.
    • If demand is high, firms earn supernormal profits (P > ATC).

  • Long Run Equilibrium

    • Supernormal profits attract new entrants, reducing market share and demand for existing firms.
    • Demand curves shift left until firms earn normal profits (P = ATC).
    • Firms operate with excess capacity (not at minimum ATC), leading to inefficiency.

Non-Price Competition

  • Firms compete via advertising, packaging, and product features rather than price.

Example: Fast-food chains (e.g., McDonald’s vs. Burger King).