Market Structures: Imperfect Competition, Monopoly, Oligopoly
Understanding Market Structures
A market is considered to exhibit imperfect competition when traders have the ability to influence the market price individually.
- The product is not homogeneous.
- There are barriers to entry.
- There are few sellers (few deals).
- The market share is concentrated.
A company will only increase its production if its profits will increase. Maximum benefit is achieved when Marginal Revenue equals Marginal Cost.
Monopoly
A monopoly exists when the market supply is controlled by a single company.
- There is a single provider.
- The product is homogeneous.
- There are significant barriers to entry.
- The company determines the quantity to produce and its price.
- The quantity sold depends on demand.
Some examples of monopolistic companies include Coca-Cola, Telmex, and American Airlines.
A monopoly firm will obtain its maximum benefit, similar to imperfect competition, when Marginal Revenue equals Marginal Cost. However, the average revenue will always be lower than the marginal revenue.
Monopolistic Competition
In monopolistic competition, many companies sell similar but differentiated products. Each company operates as a limited monopoly and will produce the quantity where marginal cost equals marginal revenue, aiming for extraordinary profits.
- There are many suppliers.
- The product is not homogeneous.
- There are no significant barriers to entry.
Some clear examples include tobacco, detergents, and cars.
Oligopoly
An oligopoly is a market where a few companies participate *without* a formal agreement between them. They engage in strategic behavior, making decisions while anticipating reactions from competitors.
- There are few sellers.
- The product *can be* homogeneous *or differentiated*.
- There are barriers to entry.
- Agreements on prices may exist to avoid price wars.
Tobacco and cars are two examples of industries with oligopolistic structures.
Price Competition
When the product is homogeneous, it must be differentiated by price. Many companies compete, potentially leading to a price war. Lowering prices increases competitiveness but may risk profitability. The company with the lowest costs will ultimately prevail.
Cartels
Cartels are formed to avoid price competition. It is a grouping of companies that agree on conditions to prevent market competition. To maximize their benefits, they act as a monopoly, coordinating prices, product features, and sales territories.
Six Conditions for a Stable Cartel
- Few companies participating.
- Similar cost structures among participants.
- Inelastic demand (demand varies little with price changes).
- Mutual surveillance is possible.
- Orders are small and frequent (not every purchase is negotiated).
- In case of a breach of the agreement, retaliation from other companies severely hurts the violator.
Microeconomic Policy
There are two main types of economic thought:
- Microeconomics: Studies how markets function and the policies related to them. Microeconomic policy refers to the set of measures and actions undertaken by the government in relation to these markets.
- Macroeconomics.
There are two main Economic Theories:
- Keynesian: Advocates that the state should *not* intervene; the market should self-regulate.
- Neoclassical: Focuses on the state *must* intervene in the economy.
To regulate the proper functioning of the market, the state is responsible for:
- Ensuring private property rights.
- Defending competition.
- Correcting information asymmetry.
- Correcting negative externalities and enhancing positive externalities.