Monopoly Versus Perfect Markets

This paper investigates the two extremes of market structures. A monopoly firm, and a firm which operates in a perfectly competitive market. We will compare features, similarities, differences, advantages and disadvantages. The monopoly firm I have chosen is Thames Water. This company is an accurate example, as it’s the sole supplier of the industry. The firm, is the industry. Thames Water supply water through peoples taps in and around London. Fyffe is my chosen firm in a perfectly competitive market. I think this is a good example. It sells bananas to supermarkets and food suppliers, who resell on to customers. The next two paragraphs explain the features of perfect competition, then a monopoly.

“The theory of perfect competition illustrates an extreme form of capitalism.” (Sloman, 2007:113) There are many suppliers, who all only supply and produce a small fraction of the total output, of the whole industry. None of the firms have any power over the market.(Mankiw, 2001) Barriers to entry do not exist. Therefore firms can enter and leave the market freely. Apart from the money and time it takes to set up the business, there are no other obstacles. Both producers and consumers have perfect knowledge of the market. Therefore they both know prices which should be paid, quality which should be met, availability of the product. Market opportunities for expansion, and entry opportunities in the industry as a whole. The price Fyffe must charge for their bananas will depend upon the demand and supply of the whole market, not just Fyffe personal demand. Hence they have no power over prices. They must follow the market forces.(Sloman, 2007)Established firms in the banana industry have no advantage over firms who have newly entered the market.(Parkin, Powell, Matthews)“This means they can sell all the products they can produce at the market price, but none at a price which is higher.” (Sloman, 2007:114) If Fyffe raise their selling price above p1, their demand will drop