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Perfect Competition: Perfect competition is a type of market structure where there are number of sellers and large number of buyers in the market and offers homogeneous product. In this market structure firms are price takers and accept the price on the basis of demand and supply. Buyers in this market structure have complete knowledge and information of product and price because of presence of number of rivals in the market. Firms in this market structure earn enough profits to compete by selling products that have minimum differences in prices and features. As in this market prices are set according to demand and supply of products, slight change in prices resultant in switch by buyers to substitute products. For instance, in agricultural sector farmers are large number of sellers and there are large number of buyers too in this industry with little variation in price and products (Campbell, Goldfarb & Tucker, 2015). Another example is supermarket, like Woolworth and Aldi, there is little variation in pricing and products so her exist the situation of perfect competition.
Monopoly: Monopoly market is the market in which number of sellers is less and number of buyers is more. In this structure, firm sell unique products due to that competition is less and entry in the market is difficult. Monopoly in the market is retained because of government license, patent, copyright, high investment and ownership of resources. Monopoly market has many benefits such as stability of prices, economies of scale and high investment on research and development. Monopoly market structure has following characteristics such as firms in this structure are price maker; in this market entry of barriers is high and profits are more (Merhav, 2017). For example, Microsoft is software and computer manufacturing company that captures more than 75% of share in the tech space. De Beers is well known company in the diamond industry this is the example of monopoly in Australia.
Oligopoly: Oligopoly market structure has two or more number of firms that operates in that market and number of buyers is more. In this market there is no restriction on the upper limit but the number of firms is that low that influences each other to greater extent. The external factors affect the formation of oligopoly market mainly economic and legal factors. In oligopoly, legal factors and economic factors are concerned to blocking of new entrants in the market, increasing prices and slow innovation. Firms in the oligopoly in order to avoid price war, set prices in a cartel or under the leadership of one firm due to that profit margin under oligopoly are higher (Baldassarri, 2016). Oligopoly market structure lacks uniformity and high investment on advertising of products in order to attract more or larger customer base. Since, there are few sellers in this structure any change by one seller affects the other firms and all firms need to implement this in order to avoid price war and to remain competitive in the market. Oligopoly market has following characteristics that are heavy capital expenditure, high cost of entry because of licensing (Davis & Hashimoto, 2016). In Australia examples of oligopoly are Kellogg’s, Hoyts and Coca Cola. These firms operate in oligopoly market as prices are set in group cohesion and this maintains level of competition in the market.
Monopolistic Competition: Monopolistic market is the type of imperfect market where there are many sellers but each one has differentiated products and services. Hence there is no perfect substitute available in the market. Monopolistic markets have following characteristics that are many sellers and many buyers in the market and sellers have some degree of control in prices with few barriers of entry and exit in the market. Monopolistic market produce heterogeneous products due to that there is no price war between firms. Further, buyers in monopolistic market do not have complete information about products because each product has some unique features and accordingly firm charge prices for features they offer so there is no chance of perfect or complete information to buyers (Sa, 2015). For instance, fast food industry like Burger King and McDonald are operates in monopolistic competition. Hairdresser’s services are part of monopolistic competition because in this industry there are many firms and many buyers, freedom of exit and entry and differentiated services and inelastic demand.
Perfect competition market structure is that in which there are many sellers and many buyers with homogeneous products or products that are identical and similar. In this market buyers are knowledgeable and informed about price and products. On others side, monopolistic market structure is considered as the imperfect market structure. In this market, there are many sellers but there is no similarity or identical products. The differentiation and uniqueness in products in monopolistic market is higher and due to that buyers are not that informed about products and prices (Cattani, Porac & Thomas, 2017). Monopolistic competition is the combination of both the markets that are monopoly and perfect competition. This type of structure is mainly found in practical scenario.
Barrier to entry and exit: For perfect competition, entry and exit in the market is free because of less restriction by government. In monopolistic market structure, entry and exit of seller’s are easy but have few restrictions in order to reduce competition.
Number of buyers and sellers: In perfect competition market, number of sellers and buyers are more this leads to stiff competition between firms. On other side, in monopolistic market number of sellers and buyers are same but everyone has different products to offer that means there is no perfect substitute of each other available in the market.
Product Differentiation: Perfect competition exists because of homogeneous products that means there are close substitute of each product. In monopolistic competition, products are heterogeneous that means there is no close substitute and each product has some unique feature that means higher chances of product differentiation (Mahoney & Weyl, 2017).
Awareness level of buyers: Awareness level or knowledge about product and prices to buyers are high in case of perfect competition and less in case of imperfect or monopolistic competition. Buyers are not that aware about prices and products in monopolistic market because of non-identical products.
Elasticity: The demand curve slopes downward in case of monopolistic market structure in contrast to perfect competition the demand curve of firms are perfectly elastic. This is because in firms are price takers and slight change in price might leads to change in demand of goods and services. In this case demand curve is perfectly elastic.
Example: Perfect competition example is that, large number of farmers that produce identical products and sell in the market at similar prices that create the situation of perfect competition in the market. Monopolistic competition market exists in each and every industry because of focus of firms on product development and product innovation. Restaurants, clothing, and other services such as salons are example of imperfect competition or monopolistic market structure.
There are differences and similarities in the profit making abilities and efficiency of both the market type structure that are: In both, monopolistic competition and perfect competition firms focus on profit maximizing and in both of these markets firms ears profits only in long run and profit and losses in short run . In monopolistic markets, firms are not able to attain productive efficiency because consumers are ready to pay higher prices for products due to high level of differentiation. Monopolistic markets have following characteristics that are many sellers and many buyers in the market and sellers have some degree of control in prices with few barriers of entry and exit in the market In perfect competition firms achieve productivity and efficiency in long run because firm’s profit margin is less due to homogeneous product offering (Etro, 2019).
In a nutshell, there are many differences n both the markets because of number of buyers and sellers, product differentiation, market power, price control and profitability. There are similarities in both the market in term of profitability as firms earn in long run and in both the markets entry and exit are easy due to low investment. Further, the situation of perfect competitive market does not exist in practical scenario. In most of the industries, firms operates in imperfect competition or monopolistic market by offering unique or innovative products in the market in order to survive for long run and to attain economies of scale.
Baldassarri, M. (Ed.). (2016). Oligopoly and dynamic competition: firm, market and economic system. Springer.
Campbell, J., Goldfarb, A., & Tucker, C. (2015). Privacy regulation and market structure. Journal of Economics & Management Strategy, 24(1), 47-73.
Cattani, G., Porac, J. F., & Thomas, H. (2017). Categories and competition. Strategic Management Journal, 38(1), 64-92.
Davis, C., & Hashimoto, K. I. (2016). Economic integration, monopoly power and productivity growth without scale effects. Review of Development Economics, 20(1), 152-163.
Etro, F. (2019). Monopolistic competition for the market with heterogeneous firms. Economics Letters, 179, 9-12.
Mahoney, N., & Weyl, E. G. (2017). Imperfect competition in selection markets. Review of Economics and Statistics, 99(4), 637-651.
Merhav, M. (2017). Technological dependence, monopoly, and growth. Elsevier.
Sá, N. (2015). Market structure and welfare under monopolistic competition. Economics Letters, 132, 69-72.
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