Perfect Competition vs. Monopoly: Understanding Market Structures

Posted on Apr 27, 2024 in Economy

Perfect Competition

Characteristics of Perfect Competition

  • Many firms, each producing a differentiated product
  • Firms have no influence over price (price takers)
  • Barriers to entry and exit force firms to sell at market price
  • Horizontal demand curve for individual firms
  • Downward-sloping demand curve for the market
  • Firms produce at the output level where marginal cost (MC) equals marginal revenue (MR)

Examples of Perfect Competition

  • Agricultural markets
  • Foreign exchange markets

Monopoly

Characteristics of Monopoly

  • Single seller of a unique product with no close substitutes
  • Significant barriers to entry
  • Downward-sloping demand curve
  • Monopolist can charge whatever price it wants
  • Profit maximization occurs where MR=MC, but price is greater than MC

Examples of Monopoly

  • Utility companies
  • Pharmaceutical companies with patented drugs

Monopolistic Competition

Characteristics of Monopolistic Competition

  • Many firms producing slightly differentiated products
  • Some control over price due to product differentiation
  • Downward-sloping demand curve
  • Firms produce at the output level where MR=MC
  • No long-run economic profits due to ease of entry and exit

Examples of Monopolistic Competition

  • Restaurants
  • Retail stores

Oligopoly

Characteristics of Oligopoly

  • Few large firms dominating the market
  • Interdependence among firms
  • Significant barriers to entry
  • Kinked demand curve theory suggests that firms follow price decreases but not increases

Examples of Oligopoly

  • Automobile industry
  • Airline industry

Antitrust Laws and Regulations

  • Sherman Act: Prevents monopolization and conspiracies in restraint of trade
  • Clayton Act: Prohibits price discrimination, exclusive dealing, and tying contracts
  • Federal Trade Commission (FTC): Deals with unfair methods of competition and deceptive acts

Key Economic Concepts

  • Price discrimination: Charging different prices to different customers for the same product
  • X-inefficiency: The tendency of firms with market power to operate at higher costs than necessary
  • Economies of scale: Cost advantages that firms experience as they increase their scale of production