Q3

1. Discuss the key characteristics of three main market structures, perfect competition, monopoly, and oligopoly?

The four main market structures that exist in the 21st century’s capitalist world are perfect competition, monopolistic competition, monopoly, and oligopoly. Each structure differs in terms of the number of firms (sellers) and buyers, freedom of entry, nature of products offered, and the demand for certain products within any market. This feature delves into finding out the essential characteristics of perfect competition, monopoly, and oligopoly and how one differs from others.

Perfect competition denotes a market structure that can simply be put be described as the “free market.” The number of buyers and sellers in this market is numerous, which means that buyers are not forced to buy their essentials from only a few sellers, and neither can sellers sell only to a selected few customer base. Restrictions for new-comer sellers in such a market are negligible. Hence there is considerable competition among the sellers, which makes them want to excel in their services as a result of which buyers have many options about substitutes, quality, and prices. Besides, in such a market, no seller has the absolute power to influence or determine rates individually. As far as firm revenues are concerned, firms operating in perfect competitive markets earn zero net profits because when firms start making positive economic profits in the outset, more firms enter the industry considering it a valuable one. However, with the ensuing competition, prices drop, causing losses and the exit by many firms that entered the market. This lead towards higher supplier by fewer firms which earn them profit, but the net profit remains zero at the end.

The second prominent market structure is the monopolistic structure in which there is only one seller, although buyers are many. In the monopolistic markets, due to the lack of competition, the seller determines prices as they desire and making supernormal profits. There is no threat to the hegemony of the single seller as there exist enormous restrictions for entering the particular market in the form of licenses, patents, the technological superiority of the hegemon, lack of substitutes, and control over raw material or other essential products needed for the manufacturing of any product.

In the oligopoly market structure, there are various sellers but still less than in the perfect market structure. Each seller has a significant share in any industry overall. Because the competition is relatively nominal as compared to the perfect competition, so the firms set prices as per their wishes in this structure too. Often times, firms functioning in such structures also collude together to set prices or outputs at certain levels to earn almost supernormal profits. They adopt this colluding technique because, at the peak of their collaboration, they cumulatively act as a monopoly. For this purpose, they may also lower their supplies so that the collective output equals just to that of a monopolistic structure. Nonetheless, they somehow compete via different advertising techniques, etc. however, there also exist some factors that might call-off collusion. For example, in several places, the fixation of prices by the firms is illegal as in the United States. Moreover, when the only competitors in the market are one’s arch competitors, then it gets challenging to cooperate over something that will affect one’s earnings and profits. Similarly, price-leadership is also a significant characteristic of the oligopolistic market structure. In this mechanism, that can also be described as parallel pricing, the dominant seller in the market set a price, and the rest of the sellers have to follow because they will not be able to afford to compete with the dominant seller by selling at higher rates.

1. How does a monopoly market differs from a perfectly competitive market? Which is more preferable for consumers? Use a diagram to assist your discussion.

Monopolistic market structure is precisely opposite of the perfect competition market structure. In the former one, there exists only one supplier of any product or service. In the later one, there exist a lot of many suppliers, and customers have numerous alternatives to choose from in terms of the supplier or even the product or service. In the monopolistic market, prices are determined as per the wishes of the market hegemons who always try to earn supernormal profits whereas, in perfect competition, market prices are driven by rivalry among many competitors, which leads toward providing better quality products at lower prices to the customers. However, this is not the case in the monopolistic markets, where consumers are forced to t buy the available products mostly at unreasonably high rates. This factor can lead to innovation stagnation as the suppliers will not bother to improve their services because they are aware of the fact that the customers do not have any other alternative and will stay loyal to them although forcefully. On the other hand, in the perfect competition markets, competition leads towards production of more output, as also depicted in the graph, and innovation aimed at improving services or the quality of the products that any firm offers, which in turn makes the lives of the consumers easier as time passes.

For the reasons mentioned above, one can safely state that consumers prefer perfect competitive market structures all around the world over the monopoly market structure. Consumers in the perfect competition market have complete information about the products or services that they are consuming, as in about the processes and materials adopted for manufacturing and providing products and services, respectively, by a firm.They are also provided with a number of alternatives as well as with ample supply of outputs.

Perfect competition markets are an epitome of the free market, a concept mainly believed to have been proposed by eighteenth-century Scottish political economist Adam Smith. As advocated by Smith, such markets are regulated by an “invisible hand” that keeps the order of the market intact, particularly the prices, as clearly manifested in a perfect competition market. It is, however, important to note that perfect competitive markets do not exist in today’s world. The agriculture sector also only comes a little close to this structure.

From thegraph as well as from the analysis presented above, it can also be deduced that monopolistic market structures thrive at the expense of the consumers’ economic interests and producer surplus is far greater than the consumer surplus as also depicted in the below diagram.

Therefore consumers widely acknowledge that their needs get exploited in such a system and hence despise it over the perfect competition market.