Understanding Market Structures: Competition to Monopoly
Different Types of Markets
Not all markets are equal. When we buy something, we face different market types. Internet companies, for example, have few competitors, but suppliers offer similar products, leading to competition. This competition causes suppliers to behave differently depending on the market, and strategies are developed to compete, including price changes. Fewer firms mean less competition and a greater possibility of price increases. Consumer protection laws exist to regulate these situations.
Market Models of Perfect Competition
Characteristics:
- Very few barriers to entry and exit. For example, agriculture allows producers to switch products without significant cost.
- A large number of producers, each with a small market share.
- Homogeneous products: there is no difference between products from different sellers.
- Perfect information: producers and consumers know the product’s features and price.
- Producers have no power to fix prices; they are price takers, accepting the market price, which is equal for all. This prevents any single producer from charging a higher price.
Perfect Competition
A market where many small companies produce a single, undifferentiated product. None can influence the price.
Equilibrium in a Perfectly Competitive Market (Long Term)
In the short term, a high market price can lead to extraordinary profits for producers. In the long term, the equilibrium price is where all producers cover their costs but make no special profit. This price allows producers to offer goods sustainably and benefits consumers with the best possible price and quantity. (In the very long term, prices tend to decrease.)
Barriers to Entry for Business Activities
Obstacles preventing or hindering a company from starting an economic activity. These can be legal (requirements or state limits on the number of firms) or economic (high initial investment requirements).
Imperfect Competition
Suppliers have some power and can influence product prices. They prefer this system due to less competition and price-setting power. Various factors can cause a market to deviate from perfect competition.
Monopolistic Competition
Features:
- A large number of suppliers with low entry barriers.
- They sell similar but distinct products.
- Producers have some power to fix prices, but not excessively.
- Prices are higher than in perfect competition.
- Producers differentiate their products to attract consumers.
Oligopoly
A market with high entry barriers, often due to large investment requirements or restrictions limiting competition (e.g., mobile phone market). A few large companies dominate, each with a significant market share. Decisions by one firm influence the others, leading to strategic interactions. Oligopolistic firms often differentiate their products. Sometimes, a leading company with a higher market share sets prices, and others react. Collusion: Agreements between firms in an oligopoly to increase profits (e.g., price fixing).
Market Share
The portion of a sector’s global production controlled by a company, product, or brand.
The Monopoly
A market with no competition, where only one company offers the product or has over 90% market share. This company controls all or most of the supply.
Why Do Monopolies Exist?
Monopolies exist due to significant barriers to entry:
- Control of essential resources by one company.
- Technological superiority allowing a single company to produce a product.
- Legal monopolies: the state allows a single company to offer certain products (e.g., patents).
Natural monopolies occur mainly in utilities (water, electricity, telecommunications) due to high fixed costs and low variable costs. Average costs create these monopolies.
Consequences of Monopoly
Prices are higher, and the quantity produced is lower than in competitive markets.
Monopoly Control
Prohibiting monopolies through legislation can have negative consequences. Natural monopolies in strategic sectors often belong to the state to ensure service provision. The state may regulate prices for administrative monopolies or concessions.
The Labor Market and Its Components
Labor: The contribution of human physical and intellectual effort to production. Wages are paid for this contribution.
Who’s Who in the Labor Market
Further content on labor market participants would go here.