Question

Write a 1,000 word essay on Price Discrimination and Market structure in a Perfect competition system. Proper use of in text citations and references are required.

Answer 1

A business has to accept the market price in a competitive market but a monopoly can set a price that maximizes its own benefit. The quantity and price of the commodity are balanced according to the elasticity of the market. If demand is inelastic, then the monopolist will raise income by increasing prices, where the price rise more than balances the decrease in quantity, but if demand is elastic, then the decrease in quantity sold would more than outweigh the price increase, resulting in lower monopoly revenues. If the demand elasticity for the entire market was the same then the monopolist would maximize profit by setting a single price.

To investigate how price discrimination can increase the income of a monopoly, consider a monopoly that has perfect price discrimination (aka first-degree price discrimination)—that is, it can price the commodity so it is exactly equal to the ability of each consumer to pay. While no monopoly can practice perfect price discrimination, it does simplify the research, since the curve of marginal revenue is exactly the same as the curve of market demand. As for a competitive firm, therefore, marginal revenue is equal to market price. A profitable business must manufacture until the marginal cost is equal to the selling price making more or less income than that does.

The marginal revenue curve coincides with the market demand curve under total price discrimination, so the monopolist cannot manufacture until the marginal cost is equal to the product's price. Also optimizing allocative efficiency when price is equal to marginal cost. However, remember that purchasers experience no market surplus at all under complete price discrimination. Instead, overall surplus is made up entirely of monopoly product surplus.

Perfect Competition is a market environment with a large number of buyers and sellers participating in the buying and selling of homogeneous goods at a single market price. In other words, perfect competition, often referred to as pure competition, occurs when there is no direct rivalry between the rivals and all offer the same goods identically.

Large number of buyers and sellers: The buyers and sellers are big enough in perfect competition that no person can control the industry's price and production. An individual consumer can not affect the product's price, because it is too low in comparison to the overall market. Similarly, the amount of production can not be affected by a single seller, who is too limited in comparison to the gamut of sellers on the market.

Homogeneous product: The homogeneous product is offered by each competing firm, so that no individual has a preference over the others for a particular seller. Salt, wheat, gas, etc. are some of the homogeneous goods that consumers are indifferent to and purchase from the one that pays a lower price for. A price increase will thus encourage the customer to go to some other supplier. The companies are free to enter or leave the market, under the perfect competition. It means that if a company suffers from a massive loss due to the industry's extreme rivalry, then it is free to exit the industry and continue its business operations in any of the industries that it likes.

Total price and technology awareness: this means that both buyers and sellers have full knowledge of market trends such as commodity costs and the latest technologies used to manufacture them. Therefore they can buy or sell the goods wherever and whenever they want. Transportation expenses are missing, i.e. incurred in moving the goods from one market to another. It is an important condition of perfect competition, as the homogeneous commodity should have the same market price, and if the cost of transport is applied to it, then the prices will differ.

The buyers as well as sellers are free to buy and sell the products and services in the perfect competition. It ensures that any consumer can purchase from any seller, and that any seller can sell to any buyer. The prices are therefore liable to adjust freely according to the terms of demand-supply. No major producer and government may interfere in such a situation and regulate the market, supply or price of the goods and services. Therefore, a seller is the price taker in perfect competition and can't control the market price.

The single business takes its price from the market, and is thus referred to as a price-taker. The company is made up of all branch companies and the retail price is where consumer demand is equal to market supply. Every single company has to charge the price and can not deviate from it. Nevertheless, if the existing firms make supernormal profits, in the long run companies are drawn into the industry. It is because there are no entry barriers and because the information is fine. This entrance into the market has the effect of moving the supply curve of the market to the right, which pushes down the price to the point that all the super-normal profits are depleted. If businesses make losses, they will leave the sector because there are no exit barriers and this will move the supply to the left of the business, which will increase costs and allow those left in the sector to gain normal income.

Perfect competition can be argued to deliver the following advantages: Since there is perfect knowledge, there is no information loss and the knowledge is spread equally among all participants. There are no entry barriers and current companies can't gain any monopoly control. Just usual profits were made, so producers should only cover the cost of their chance. There is no need to spend money on ads, since the technology is great and businesses can sell anything they can make. Additionally, the selling of unbranded products makes an successful advertising campaign difficult to create.

Behavioral economists, who have become highly popular over the last decade, challenge the premise that producers and consumers behave rationally. Many studies have shown that decision-making sometimes falls well short of what could be described as perfectly logical. Decision-making may be skewed and subject to the 'guidance' rule of thumb as consumers and producers face complicated circumstances.