Fill This Form To Receive Instant Help
Homework answers / question archive / Describe the basic characteristics of pure competition, monopoly, monopolistic competition, and oligopoly
Describe the basic characteristics of pure competition, monopoly, monopolistic competition, and oligopoly. Give examples of each.
Pure Competition/ Perfect Competition:
* Perfect Competition is characterised by a form of market where there are large number of buyers and sellers in the market.
* The presence of large number of sellers make the share of each seller in the market very low, or insignificant.
*The presence of large number of buyers and sellers make the goods sold in this market perfectly elastic.
*The perfectly elastic demand makes each individual seller a price taker.
* All the sellers in perfect competition, sells identical products.
* Since the price is predetermined in the market, each individual seller adjusts their output as per their marginal costs.
* There is free entry and exit in the market.
* The buyers and the sellers possess complete information
* Perfect competition is an ideal market structure. Such types of market structure may not be seen in real life but it helps in understanding the degree of market powers present in the different existing markets.
Monopolistic competition:
* In monopolistic competition, there are large number of buyers and sellers, but the number of sellers is comparatively less than that of perfect competition.
* The entry and exit norms in the markets are relaxed
* Each sellers sells differentiated product.
* The product differentiation gives a certain degree of price and output decision making power to the sellers in the market.
* The competition in the market is high, due to the availability of close substitutes.
* Due to the presence of high competition, the sellers often resort to advertisements for product promotion.
* The price output decision in this market results in allocative inefficiencies.
* Example: There are several shampoo selling brands such as: Pantene, Garnier, Sunsilk Neutrogena etc. These brands sell the same product which is shampoo, but there are still some product differences, which makes one brand different from another.
Oligopoly:
* In oligopoly competition, there are few sellers in the market selling either identical or differentiated products.
* In oligopoly, all the sellers are interdependent on each other for pricing and output decisions.
* Each seller would observe the strategies of the other seller regarding price and output and decide his/ her price and output accordingly.
* Since there is presence of few sellers in the market, all the sellers can also come together and form a cartel to regulate prices and output in the market.
* There are barriers of entry in the market which includes : high investment requirements, strong consumer base, and economies of scale.
* In terms of price output decision making, oligopolists tend to search for best price output combinations.
* Example : In US, funeral service providers can be said to be oligopolists. Similarly there are only few prominent music service providers such as Universal Music Group, Sony and Warner.
Monopoly:
* In Monopoly, there is only one seller and large number of buyers in the market.
* The presence of single seller in the market is due to barriers of entry into the market, natural monopolies, economies of scale, large capital requirements, absence of substitute goods, legal barriers and technological superiorities.
* Since there is only one seller in the market, the individual seller's demand represents the entire market demand and there is no supply curve.
* The demand in this form of market is relatively inelastic and slopes downwards.
* The monopolist is a price maker and tends to set his/her price and output at the level where his/her profits will be maximised.
* The monopolist can also engage in price discrimination and charge different prices to different consumers, or at different markets.
* Example of Monopoly : public services like railways and defence are provided by the governement and private players are not allowed to enter this market.