The 4 Types of Market Structure

Only available on StudyMode
  • Download(s) : 3684
  • Published : January 7, 2013
Open Document
Text Preview
Comparison and contrast the 4 types of market structure:
Perfect Competition
Definition
* there are many buyers and sellers, the products are homogeneous and sellers can easily enter and exit from the market Characteristics
* Large number of buyers and sellers – firms are price takers. * Homogenous or standardized product – the buyers do not differentiate the products of one seller to another seller. * Free of entry and exit into the market.

* Role of non-price competition is insignificant.
* Perfect knowledge of the market – all the sellers and buyers in perfect competition market will have perfect knowledge of that market. Monopolistic
Definition
* There are large numbers of small sellers selling differentiated products. These products are close substitute and firms have easy entry and exit from the market. Characteristics
* Large number of buyers and sellers – Each firm produces different or unique products, so they have some control over the prices and follows an independent price-output policy. * Differentiated products – Product differentiation could be through packaging, design, labelling, advertising and brand name. * Free of entry and exit into the market – Not as easy as perfect competition because of the existence of product differentiation. * Role of non-price competition is significant – Various methods used to attract the customers to buy a particular brand. * Selling cost – Different types of expenditure on advertisement would incur additional cost. Oligopoly

Definition
* there are only a few firms selling either standardized or differentiated products and it restricts the entry into and exit from the market Characteristics
* Few numbers of firms – The number of firms is small but size of the firms is large. * Homogeneous or differentiated products – These products can be standardized products such as steel, zinc or copper which is price based. Other industries such as electronics automobiles offer different products where emphasis is on non-price competition, such as advertisers. * Mutual interdependence – Firms in an oligopoly market always considers the reaction of their rivals when choosing price, sales target, advertising budgets and other business policies. * Barriers to entry – Restricts new entrants into the market through various types of barriers of entry such as the control of certain resources, ownership of patents and copyrights, exclusive financial requirements and legal barriers. Monopoly

Definition
* There is a single seller and large numbers of buyers that sell products that have no close substitutes. The entry and exit barriers are also high.

Characteristics
* No close substitutes – Monopolies firm would sell products in which there are no close substitutes. * Restriction of entry of new firms.
* Advertising: Advertising in a monopoly market depends on the products sold. Advantages and disadvantages:
Monopoly
Advantages
1. Stability of price
* In a monopoly market the prices are most of the times stable. This happens because there is only one firm involved in the market that sets the prices if and when it feels like. In other types of market structures prices are not stable and tend to be elastic as a result of the competition that exists but this isn’t the case in a monopoly market as there is little or no competition at all. 2. Source of revenue for the government

* The government gets revenue in form of taxation from monopoly firms. 3. Massive profits
* Due to the absence of competitors which leads to high number of sales monopoly firms tend to receive super profits from their operations. The massive profits realized may be used in such things as launching other products, carrying out research and development among many other things that may be beneficial to the firm. 4. Monopoly firms offer some services effectively and efficiently.

Disadvantages
1. Exploitation of...
tracking img