Presentation on theme: "Other Market Structures. Monopolistic Competition Many companies sell products that are similar, but not identical Four Conditions Many firms Few."— Presentation transcript: 1 Other Market Structures Show
2 Monopolistic Competition Many companies sell products that are similar, but not identical Four Conditions Many firms Few artificial barriers to entry Slight control over
prices Differentiated products 3 Monopolistic Competition Non-price Competition Ways, other than
price, to attract customers Physical characteristics Location Service level Advertising, image, or status Profit is not too high Fierce competition New firms will continue to enter the market 4 Oligopoly A few large firms dominate the market Four largest firms produce at least 70-80% of the output Barriers to entry A lot, but not impossible Some variety of goods Some control over prices The top companies can work together to drive up prices Collusion Illegal How different industries are classified and differentiated based on their degree and nature of competition for services and goods What is Market Structure?Market structure, in economics, refers to how different industries are classified and differentiated based on their degree and nature of competition for goods and services. It is based on the characteristics that influence the behavior and outcomes of companies working in a specific market. Some of the factors that determine a market structure include the number of buyers and sellers, ability to negotiate, degree of concentration, degree of differentiation of products, and the ease or difficulty of entering and exiting the market. Summary
Understanding Market StructuresIn economics, market structures can be understood well by closely examining an array of factors or features exhibited by different players. It is common to differentiate these markets across the following seven distinct features.
By cross-examining the above features against each other, similar traits can be established. Therefore, it becomes easier to categorize and differentiate companies across related industries. Based on the above features, economists have used this information to describe four distinct types of market structures. They include perfect competition, oligopoly market, monopoly market, and monopolistic competition. Types of Market Structures1. Perfect CompetitionPerfect competition occurs when there is a large number of small companies competing against each other. They sell similar products (homogeneous), lack price influence over the commodities, and are free to enter or exit the market. Consumers in this type of market have full knowledge of the goods being sold. They are aware of the prices charged on them and the product branding. In the real world, the pure form of this type of market structure rarely exists. However, it is useful when comparing companies with similar features. This market is unrealistic as it faces some significant criticisms described below.
2. Monopolistic CompetitionMonopolistic competition refers to an imperfectly competitive market with the traits of both the monopoly and competitive market. Sellers compete among themselves and can differentiate their goods in terms of quality and branding to look different. In this type of competition, sellers consider the price charged by their competitors and ignore the impact of their own prices on their competition. When comparing monopolistic competition in the short term and long term, there are two distinct aspects that are observed. In the short term, the monopolistic company maximizes its profits and enjoys all the benefits as a monopoly. The company initially produces many products as the demand is high. Therefore, its Marginal Revenue (MR) corresponds to its Marginal Cost (MC). However, MR diminishes over time as new companies enter the market with differentiated products affecting demand, leading to less profit. 3. OligopolyAn oligopoly market consists of a small number of large companies that sell differentiated or identical products. Since there are few players in the market, their competitive strategies are dependent on each other. For example, if one of the actors decides to reduce the price of its products, the action will trigger other actors to lower their prices, too. On the other hand, a price increase may influence others not to take any action in the anticipation consumers will opt for their products. Therefore, strategic planning by these types of players is a must. In a situation where companies mutually compete, they may create agreements to share the market by restricting production, leading to supernormal profits. This holds if either party honors the Nash equilibrium state and neither is tempted to engage in the prisoner’s dilemma. In such an agreement, they work like monopolies. The collusion is referred to as cartels. 4. MonopolyIn a monopoly market, a single company represents the whole industry. It has no competitor, and it is the sole seller of products in the entire market. This type of market is characterized by factors such as the sole claim to ownership of resources, patent and copyright, licenses issued by the government, or high initial setup costs. All the above characteristics associated with monopoly restrict other companies from entering the market. The company, therefore, remains a single seller because it has the power to control the market and set prices for its goods. Related ReadingsThank you for reading CFI’s guide on Market Structure. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:
What market structure has companies that have identical products?In a perfect competition model, there are no monopolies. This kind of structure has a number of key characteristics, including: All firms sell an identical product (the product is a commodity or homogeneous).
Is where many companies compete in an open market to sell products that are similar but not identical?In monopolistic competition, many companies compete in a open market to sell products that are similar but not identical.
Do oligopoly sell similar products?In an oligopoly, a few sellers supply a sizable portion of products in the market. They exert some control over price, but because their products are similar, when one company lowers prices, the others follow.
Does monopolistic competition sell identical products?In monopolistic competition, we still have many sellers (as we had under perfect competition). Now, however, they don't sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose.
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