Market Structures: Perfect and Imperfect Competition
Market Structures
The Market
The market is the physical or virtual space where buyers and sellers exchange goods and services. Markets can be categorized according to:
Geographical Area or Space
- Local
- Regional
- National
- Worldwide
Nature of Goods
- Agricultural products
- Industrial services
Freedom of Entry
- Open market: Open to all buyers and sellers.
- Closed market: Entry is limited.
Freedom to Change
- Free market: Price is determined by supply and demand.
- Intervened market: Authorities influence price and/or quantity.
Degree of Indifference
- Perfect market: Homogeneous products; supply and demand determine price.
- Imperfect market: Products have different characteristics.
Level of Concurrency
Determined by the number of suppliers and customers in the market.
Perfectly Competitive Markets
A perfectly competitive market requires the following circumstances:
- Numerous suppliers and consumers.
- Homogeneous products (price is the key variable).
- Free entry and exit.
- Price and quantity transparency (perfect information).
- No price manipulation.
Price-Taker and Unique Market Price
In perfect competition, the price is uniform and set by market supply and demand. An individual firm cannot sell above market price due to homogeneous products and competition. Demand for an individual producer is horizontal at the market equilibrium price.
Equilibrium Price for a Firm in Perfect Competition
The selling price is constant and equal to marginal revenue. The firm aims for optimal production where Marginal Revenue (MR) equals Marginal Cost (MC).
Market Equilibrium Price Under Perfect Competition
The market reaches equilibrium through the following process:
- Price greater than equilibrium: Extraordinary profits attract new entrants (increased supply), causing oversupply and lowering the price to equilibrium.
- Price less than equilibrium: Insufficient profits reduce supply, causing excess demand and raising the price to equilibrium.
Supply and demand fluctuations drive the market towards a unique and stable long-term equilibrium price.
Barriers to Entry in Imperfectly Competitive Markets
Imperfect competition arises when conditions for perfect competition are not met. Two main groups of barriers exist:
Natural Barriers
- Limited markets: Low demand restricts competition.
- Discriminatory pricing: Oligopolies use varying prices to deter competition.
- Economies of scale: Large-scale production reduces costs, hindering competition.
- Distinct markets/Brand loyalty: Creates monopolistic competition.
- Exclusive or advanced technology: Limits competition due to lack of access or knowledge.
Artificial Barriers
Content related to artificial barriers was not present in the original text.