Market Structures: Monopoly, Oligopoly, and Competition Dynamics
Key Market Structures Explained
Oligopoly: Few Dominant Suppliers
Oligopoly is a market structure involving a few suppliers who maintain significant interdependence. An oligopoly is characterized by a small number of suppliers that serve almost the entire demand. Key features include barriers to entry for new competitors, interdependent channels, and decisions. They typically have many buyers. Examples include OPEC (a cartel), automobiles, and telecommunications.
Monopoly: Single Seller Dominance
A monopoly exists when there is only one seller in a market with many buyers. The demand curve for a monopolist typically has a negative slope. We define a monopoly market as one where: there is a single company offering the product; the product is homogeneous or has no close substitutes; and there are significant entry barriers to access the market.
Detailed Monopoly Classifications
- Legal Monopoly: In certain countries, these are established for strategic reasons, public good, or national interest to prevent competition from other companies. Legal monopolies are often state-owned or heavily regulated (e.g., postal services).
- Patent Monopoly: A company holds monopoly power when it possesses the sole known formula, controls the entire production of an essential natural resource or raw material, or holds a patent on a production process (e.g., a pharmaceutical company with an exclusive patent for a new drug).
- Natural Monopoly: This occurs when a single large company can achieve lower unit costs through higher production volumes, making it cheaper for them to supply the entire market. This is often due to high fixed costs, such as those for research and development or infrastructure (e.g., utility companies like water or electricity distribution).
Monopolistic Competition: Product Differentiation
Monopolistic competition describes markets that possess characteristics of both perfectly competitive markets and monopolies. That is, each company has some market power over the sale of its product but competes with various brands of close substitute products. Its features are: many suppliers, each with a small market share; no significant barriers to entry for new companies (resulting in no long-term supernormal profits); and product differentiation by class or brand. Examples include electrical appliances, textiles, and perfumes.
Perfect Competition: An Idealized Market Model
Perfect competition is an idealized market structure for goods and services in which the interaction of supply and demand determines the price. Its characteristics are: many sellers and buyers; the product is homogeneous in the market; buyers are well-informed about prices and quantities offered; and there is free entry and exit of firms. In the long term, if supernormal profits exist, new firms will enter production, increasing supply and thereby lowering the price until profits disappear. Ultimately, the price is determined by the market. Examples include agricultural products and fish markets.
Strategic Actions and Economic Impacts
Oligopoly: Cooperation vs. Competitive Tactics
Possible courses of action for oligopoly producers: Oligopolistic firms can adopt two main strategies: to cooperate or to compete.
A cooperation agreement is any arrangement that restricts competition between oligopolistic firms. This can manifest in several ways:
- A vertical merger involves control over different stages of the production process of the same product (e.g., an oil company like Repsol integrating exploration, refining, and distribution).
- A horizontal merger is composed of companies developing similar products (e.g., a merger of banks).
- A conglomerate merger brings together independent companies, often in unrelated business areas, within the same organization.
Perfect Competition in Global Trade: Consequences
Effects of perfect competition in international trade: The result in this type of economy is that consumers benefit, as they have access to more goods at a more affordable price. Conversely, national manufacturers may be harmed because foreign competition limits the price they can charge, and imports can take away a portion of their market. (See Figure 1).
State Support for Farmer Incomes: Key Policies
Measures the state can take to ensure a minimum income for farmers: The state may opt for two main measures to ensure farmers’ income:
- The state sets a price guarantee at which it will buy any surplus. This policy contributes to higher prices for consumers and compels a disbursement of public money. (See Chart 2).
- Another measure is to directly support farmers’ incomes through subsidies. A subsidy is direct aid to farmers, usually equal to the difference between the price they get for selling their merchandise and the guaranteed price set by the state. The formula is: Price received by farmer = Price paid by consumers + Subsidy per unit. (See Graph 3).