Four Main Macket Structures
When economists analyze the productivity and profitability of a firm, they take into account the structure of the market where the firm is operating. Classically, there are four main types of market: Perfect Competition, Monopolistic Competition, Oligopoly and Monopoly. They differ in terms of firm’s size and number, the barriers of entry and exit, the degree to which firms ' products are differentiated, and the extent of information transparency, which is the availability of information to both buyers and sellers regarding prices, product characteristics, and production techniques.
A perfectly competitive market is where there are many firms in the market, and all firms sell an identical product, actively are price takers, have a relatively small market share, information transparency, and the industry is characterized by freedom of entry and exit (1).For example, the market for agricultural products is traditionally regarded as perfectly competitive as there are myriads of farmers supplying the nearly identical quality of tomatoes or cabbages. Consequently, every participant is a ‘price taker’. Since the production and distribution process is the same for all firms, competition forces each firm to charge the same market price for its goods. The fact that products are homogenous make firms price takers, since there are plenty of substitutes and the demand curve is perfectly elastic. Barriers to entry and exit are virtually non-existent; therefore suppliers can easily enter and withdraw from the market with no sunk-cost. In the short run, firms set prices at P = AR = MC = MR, where both allocative efficiency and productive efficiency is achieved.
The other three types of market are different yet share one distinguishingly different feature from a perfectly competitive market, which is firms have to face a downward-sloping demand curve. If the company produce more to increase consumer surplus, they lose money for every extra unit of product. If they try to
A perfectly competitive market is where there are many firms in the market, and all firms sell an identical product, actively are price takers, have a relatively small market share, information transparency, and the industry is characterized by freedom of entry and exit (1).For example, the market for agricultural products is traditionally regarded as perfectly competitive as there are myriads of farmers supplying the nearly identical quality of tomatoes or cabbages. Consequently, every participant is a ‘price taker’. Since the production and distribution process is the same for all firms, competition forces each firm to charge the same market price for its goods. The fact that products are homogenous make firms price takers, since there are plenty of substitutes and the demand curve is perfectly elastic. Barriers to entry and exit are virtually non-existent; therefore suppliers can easily enter and withdraw from the market with no sunk-cost. In the short run, firms set prices at P = AR = MC = MR, where both allocative efficiency and productive efficiency is achieved.
The other three types of market are different yet share one distinguishingly different feature from a perfectly competitive market, which is firms have to face a downward-sloping demand curve. If the company produce more to increase consumer surplus, they lose money for every extra unit of product. If they try to
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