![]() ![]() By doing so, they can use their collective market power to drive up prices and earn a higher profit. The firms can either compete against each other or collaborate (see also Cournot vs. That results in a state of limited competition. OligopolyĪn oligopoly describes a market structure that is dominated by only a small number of firms that serve many buyers. Most of them probably taste slightly different, but at the end of the day, they are all breakfast cereals. ![]() There is a vast number of different brands (e.g., Cap’n Crunch, Lucky Charms, Froot Loops, Apple Jacks). However, this market structure no longer results in a socially optimal level of output because the firms have more power and can influence market prices to increase their total revenue and profit at the expense of the consumers.Īn example of monopolistic competition is the market for cereals. Now, those characteristics are a bit closer to reality than the ones we looked at in perfect competition. Monopolistic competition builds on the following assumptions: (1) all firms are profit-maximizing (2) there is free entry and exit to the market (i.e., no barriers to entry or exit), (3) firms sell differentiated products (4) consumers may prefer one product over the other (i.e., they are still very close substitutes). That gives them a certain degree of market power despite small market shares, which allows them to charge higher prices within a specific range. However, unlike in perfect competition, the firms in monopolistic competition sell similar but slightly differentiated products. Monopolistic competition also refers to a type of market structure where a large number of small firms compete against each other. If you are looking for more information on different types of competitive firms, you can also check our post on perfect competition vs. Probably the best example of an almost perfectly competitive market we can find in reality is the stock market. The idea of perfect competition builds on several assumptions: (1) all firms maximize profits (2) there is free entry and exit to the market (i.e., no barriers to entry or exit), (3) all firms sell entirely identical (i.e., homogenous) goods, (4) there are no consumer preferences. By looking at those assumptions, it becomes obvious that we will hardly ever find perfect competition in reality. This is important to note because it is the only market structure that can (theoretically) result in a socially optimal level of output. As a result, the industry as a whole produces the socially optimal level of output because none of the firms can influence market prices. In this scenario, a single firm does not have any significant market share or market power. Perfect competition describes a type of market structure where a large number of small firms compete against each other. With that said, let’s look at the four market structures in more detail. ![]() Nevertheless, they are critical because they help us understand how competing firms make decisions. ![]() It is important to note that not all of these market structures exist in reality some of them are just theoretical constructs (which can be really useful in economics sometimes). Each of them has its own set of characteristics and assumptions, which in turn affect the decision-making of firms and the profits they can make. Four basic types of market structure characterize most economies: perfect competition, monopolistic competition, oligopoly, and monopoly. ![]()
0 Comments
Leave a Reply. |