Question

describe each of the 4 market model characteristic by providing an example of an industry that might fit into each one.

Answer 1

The four market models with their characteristics are:

1. Perfect competition- a perfectly competitive market is one one which there are a large number of buyers and sellers. This means that neither an individual buyer, nor an individual seller can influence the market price, making both agents price-takers. Each seller sells the same homogenous product and thus the same price prevails throughout the market; if a seller was to raise the price, he makes a loss as all other sellers are selling the same product at a lower price, whereas if he lowers price, so does everyone else. There is also free entry and exit of firms in the market that ensures that all sellers earn only normal profits in the long run. There is perfect knowledge about prices, factors etc. among all sellers as well as buyers. While a perfectly competitive market doesn't really exist, an example of a near-perfect competition is an agricultural market, such as a local farmers market. A particular fruit or vegetable is typically sold at the same price across that market.

2. Monopoly- a monopoly is a market situation in which there exists only one seller and the number of buyers are large. Due to this, the monopolist has complete market control and is a price-maker. Given that he's the only seller, his product has no close substitutes and there is also closed entry for other firms. This also implies imperfect information in the market on part of the buyers as the monopolist is at liberty to withhold any information he chooses to. Due to this factor, the monopolist can practice price discrimination, which is to charge different prices to different consumers in different market, different times or based on difference in elasticities of demand for the consumer. Hence, the monopolist is capable of making supernormal profits in the long run as well. One example is the existence of government monopolies over postal services, toll roads, airports etc. Another example is that of the monopoly over the phone industry that AT&T used to have before other players came into picture.

3. Monopolistic competition- a monopolistic competition is a market form that has features of the perfect competition as well as monopoly. This too has a relatively large number of buyers and sellers, however, sellers here sell differentiated products (on the basis of quality, shape, appearance etc.) that are close substitutes for each other. Due to this, there are selling costs involved to promote their own product such as advertising. Similar to monopoly, here too there is imperfect information, allowing the sellers some amount of control over their own prices, subject to. the buyers elasticity of demand. There is free entry and exit of firms, again ensuring normal profits in the long run. An example of such a market form would be the market for cola drinks. Coke, Pepsi, ThumbsUp etc. are all very similar products differentiated by very minute aspects such as the appearance of the bottle. The firms engage in heavy advertising given the fact they're such close substitutes.

4. Oligopoly- this is a market structure that has a large number of buyers but a small group of sellers that control the market. Given the small number of firms, there is a high level of interdependence, implying that each firms decision has a significant impact on that of the others. Advertising plays a big role in order to capture market share and this makes it a market with strong competition. There are barriers to entry of new firms in the form of patents or licences, high capital costs etc. There is extreme price rigidity in this market, that is prices are very sticky and do not change easily as an attempt to reduce prices could result in a price war (undercutting). The current phone industry is an example of an oligopoly, as while other small providers may exist, the market is dominated by a few companies such as AT&T, Verizon, Sprint and T-Mobile.