Market Structures: Competition, Monopoly, Oligopoly, Monopolistic

Posted on Sep 16, 2025 in Economy

Perfect Competition: Market Fundamentals

Perfect competition is a theoretical market structure in which the following criteria are met: All firms sell an identical product (the product is a “commodity” or “homogeneous”). All firms are price takers (they cannot influence the market price of their product). Market share has no influence on prices.

Key Characteristics of Perfect Competition

  • Sellers: Typically small to medium-sized firms.
  • Consumers: Have many different options and extensive information to make informed choices.
  • Product: Standard and homogeneous, not a complex product.
  • Price: Firms are “price takers,” accepting the market price. They have no control over the price.
  • Marginal Revenue (MR): MR is constant, MR = Price.
  • Curves: (Graphical representation)
  • Elasticity: Very elastic, with many substitutes. Any change in price could lead to a company exiting the market.
  • Barriers to Entry and Exit: Very low, requiring minimal investment, no significant regulations, and no complex technology.
  • Profit Maximization: Achieved when Marginal Cost (MC) = Marginal Revenue (MR).
  • Short and Long Run:
    • Short Run: Potential for significant profits, attracting new companies to enter the market.
    • Long Run: More companies entering drives prices down, reducing profit margins. (Graphical representation)
  • Promotion: No promotion, as firms are not able to increase prices, and products are very basic.

Monopoly: Single Seller Market Power

A monopoly is a market structure characterized by a single seller, selling a unique product in the market. In a monopoly market, the seller faces no competition, as they are the sole seller of goods with no close substitute.

Monopoly Market Characteristics

  • Sellers: One company controlling the market; sometimes a duopoly (two companies) exists.
  • Consumers: Have few options, needing to accept the prevailing price and quality.
  • Product: Often a standard product with no competition or close substitutes, though sellers sometimes diversify the product. Innovation can create more barriers to entry.
  • Price: The company is a “price maker,” adding an extra margin called a “markup.”
  • Marginal Revenue (MR): Decreases as sales expand with lower prices.
  • Curves:
    • Perfectly Competitive Firm: (Graphical representation where market price and demand are on the same horizontal line).
    • Imperfectly Competitive Firm (Monopoly): (Graphical representation where the demand curve slopes downward, and the marginal revenue curve is below it).
  • Elasticity: Very inelastic, with no substitutes. Consumers accept almost any price.
  • Barriers to Entry and Exit: Many barriers, such as government regulations (e.g., train companies) or complex technology (e.g., nuclear energy).
  • Profit Maximization: Achieved when Marginal Cost (MC) = Marginal Revenue (MR).
  • Short and Long Run: Stable because they control the market.
  • Promotion: Yes, to build brand loyalty and avoid new competition.
  • Deadweight Loss: A loss of economic welfare due to lack of competition, representing the difference in production, output, and price between perfect competition and monopoly.
  • Natural Monopoly: A situation where a monopoly is positive for the economy because the market is too small, and competition would make costs for small companies too high. It is better to have a monopoly reach economies of scale with lower costs and lower prices.
  • Regulation of Monopoly:
    • Lump-Sum Tax: A fixed tax (amount) to be paid at the end of each economic period. Problems with this include it being a fixed cost, which can be unfair as it does not consider the firm’s profit evolution.
    • Specific Tax: A tax ratio depending on the final profits of each period.
    • Price Regulation: Involves calculating the final price of the product (cost + profit margin). The main problem is accurately calculating and proving the average costs.
    • Rate of Return Regulation: Controls or limits the return on investment for the company, setting a maximum return ratio.
    • Price Cap Regulation: The government sets a price ceiling or limit to reduce profits and lower the final price for consumers.

Imperfect Competition Defined

Imperfect competition describes a market situation where there are barriers to entry and exit, meaning competition rules are not 100% free. Business decisions are affected by external factors not directly related to the company owner. Examples include government regulation, control of prices, or high investment limits for the supply of goods.

Oligopoly: Few Dominant Firms

An oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. The concentration ratio measures the market share of the largest firms. A monopoly is one firm, a duopoly is two firms, and an oligopoly is two or more firms. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly influence the others.

Oligopoly Market Characteristics

  • Sellers: Few sellers, typically medium to large-sized firms, highly interdependent on each other’s decisions.
  • Consumers: May sometimes pay an extra price.
  • Product: Can be standard (e.g., gasoline) or differentiated (e.g., cars).
  • Price: Markup pricing; firms are price makers. Prices are often very stable due to agreements between firms.
  • Marginal Revenue (MR): Decreases when attempting to increase quantity sold.
  • Curves: Demand is elastic above the market price and inelastic below it (kinked demand curve).
  • Elasticity: Can be both inelastic and elastic depending on the curve segment. In some sectors (e.g., gasoline), it can be inelastic due to necessity.
  • Barriers to Entry and Exit: Many barriers, such as high investment (e.g., nuclear energy) or specific regulations (e.g., gasoline industry).
  • Profit Maximization: Achieved when Marginal Cost (MC) = Marginal Revenue (MR).
  • Short and Long Run: Very stable profits in this sector due to limited competition and market-sharing agreements.
  • Promotion: Yes, in some cases, extensive promotion (e.g., cars) is used.
  • Collusive Oligopoly: An agreement among oligopoly firms to set prices and/or quantities sold (e.g., OPEC, or gasoline/electricity markets in some countries like Spain). Objectives include increasing prices and profits. Such agreements are often illegal but difficult to prove, and potential government penalties may be offset by extra profits.

Monopolistic Competition: Differentiated Products

Monopolistic competition is a market structure characterized by many sellers offering differentiated products.

Monopolistic Competition Characteristics

  • Sellers: Many sellers, including small, medium, and large companies (e.g., clothing brands like Zara, Armani, small retailers, Chinese production).
  • Consumers: Have many options and ample opportunities to compare products.
  • Product: Highly differentiated.
  • Price: A mix of price takers and price makers. High competition leads to price-taking behavior, while product differentiation allows some control over price.
  • Marginal Revenue (MR): Decreases when attempting to sell more goods, as price decreases.
  • Curves: MR and demand curves are distinct and slope downward.
  • Elasticity: Elastic market due to the availability of substitutes.
  • Barriers to Entry and Exit: Not many barriers.
  • Profit Maximization: Achieved when Marginal Cost (MC) = Marginal Revenue (MR).
  • Short and Long Run: Profits tend to decrease in the long run as new companies enter the market, often approaching zero economic profit.
  • Promotion: Yes, as differentiation is critical for business strategy. Promotion builds brand loyalty, making demand more inelastic. Promotion is a fixed cost and, in this market, will increase average total costs (ATC) for companies in the short term.

Benefits of Competition & Market Regulation

Market Power and Regulation of Competition

The regulation of competition levels in the market involves assessing the advantages and disadvantages of competition and factors affecting its regulation. Having competition offers several advantages:

  • Lower and more stable prices.
  • Reduced deadweight loss.
  • Diversification of supply.
  • More elastic markets.
  • Increased consumer surplus.
  • Improved working efficiency and productivity.

Government Approaches to Competition Regulation

Governments decide the appropriate level of competition, which varies by country. For example, the USA often promotes competition but also has large monopolies (e.g., Google, Amazon). A nationalist approach might restrict foreign acquisitions (e.g., France not allowing Canada to purchase Carrefour).