ALTERNATIVE MARKET STRUCTURES
ALTERNATIVE MARKET STRUCTURES
It is traditional to divide industries to categories according to the degree of competition that exists between the firms within the industry. There are four such categories.
At one extreme is perfect competition, where there are many firms competing. Each firm is so small relative to the whole industry that it has no market power to influence price. It is a price taker.
At the other extreme is monopoly, where there is just one firm in the industry, and hence no competition from within the industry.
In the middle come monopolistic competition, where there are quite a lot of firms competing and where there is freedom for new firms to enter the industry, and oligopoly, where there are only a few firms and where entry of new firms is restricted.
To distinguish more precisely between these four categories, the following must be considered:
The freedom with which firms can enter the industry.
The nature of the product
The degree of control that the firm has over price
The market structure under which a firm operates will determine its behavior.
PERFECT COMPETITION
Assumptions of Pefect Competition
Firms are price takers. There are so many firms in the industry that each one produces an insignificantly small portion of total industry supply, and therefore has no power whatsoever to affect the price of the product. It faces a horizontal 5demand curve at the market price: the price determined by the interaction of demand and supply in the whole market.
There is complete freedom of entry of new firms into the industry. Existing firms are unable to stop new firms from setting up in business.
All firms produce an identical product. (The product is ‘homogeneous’.) There is therefore no branding or advertising.
Producers and consumers have perfect knowledge of the market. That is, producers are fully aware of prices, costs and market opportunities. Consumers are fully aware of the price, quality and availability of
It is traditional to divide industries to categories according to the degree of competition that exists between the firms within the industry. There are four such categories.
At one extreme is perfect competition, where there are many firms competing. Each firm is so small relative to the whole industry that it has no market power to influence price. It is a price taker.
At the other extreme is monopoly, where there is just one firm in the industry, and hence no competition from within the industry.
In the middle come monopolistic competition, where there are quite a lot of firms competing and where there is freedom for new firms to enter the industry, and oligopoly, where there are only a few firms and where entry of new firms is restricted.
To distinguish more precisely between these four categories, the following must be considered:
The freedom with which firms can enter the industry.
The nature of the product
The degree of control that the firm has over price
The market structure under which a firm operates will determine its behavior.
PERFECT COMPETITION
Assumptions of Pefect Competition
Firms are price takers. There are so many firms in the industry that each one produces an insignificantly small portion of total industry supply, and therefore has no power whatsoever to affect the price of the product. It faces a horizontal 5demand curve at the market price: the price determined by the interaction of demand and supply in the whole market.
There is complete freedom of entry of new firms into the industry. Existing firms are unable to stop new firms from setting up in business.
All firms produce an identical product. (The product is ‘homogeneous’.) There is therefore no branding or advertising.
Producers and consumers have perfect knowledge of the market. That is, producers are fully aware of prices, costs and market opportunities. Consumers are fully aware of the price, quality and availability of