Question

.

NEED ANSWER ASAP / ANSWER NEVER USED BEFORE, COMPLETELY NEW ANSWER PLEASE

There are four market models: perfect competition, monopolistic competition, oligopoly and monopoly. Briefly discuss the assumptions of each of these four models and give examples of each. Explain the long run economic profit earned by each of the four. Explain how the concept of economic profit might help explain the rationale for the government’s granting of monopolies to those firms that protect their product with a patent.

ANSWER THROUGHLY 1-2 pages

COPY AND PASTE NOT ATTACHMENT PLEASE

NEEDS TO BE AN ORIGINAL SOURCE ANSWER NEVER USED BEFORE

*****NEEDS TO BE A ORIGINAL SOURCE****

Answer 1

Perfect competition

Assumptions of the model

Perfect competition is considered as the ideal or the standard against which everything is judged. Perfect competition is characterised as having:

• Many buyers and sellers. Nobody has power over the market.
• Perfect knowledge by all parties. Customers are aware of all the products on offer and their prices.
• Firms can sell as much as they want, but only at the price ruling. Thus sellers have no control over market price. They are price takers, not price makers.
• All firms produce the same product, and all products are perfect substitutes for each other, i.e. goods produced are homogenous.
• There is no advertising.
• There is freedom of entry and exit from the market. Sunk costs are few, if any. Firms can, and will come and go as they wish.
• Companies in perfect competition in the long-run are both productively and allocatively efficient.

Example of Perfect Competition:

Agricultural markets are examples of nearly perfect competition as well. Imagine shopping at your local farmers' market: there are numerous farmers, selling the same fruits, vegetables and herbs. You can easily find out the prices for the goods, but they are usually all about the same.

Monopolistic competition

An industry in monopolistic competition is one made up of a large number of small firms who produce goods which are only slightly different from that of all other sellers. It is similar to perfect competition with freedom of entry and exit for firms and any supernormal profits earned in the short-run will be competed away in the long-run as new firms enter the industry and compete away the profits.

Assumptions of monopolistic competition

In monopolistic competition, as with perfect competition, we make a number of assumptions. However, do not get muddled by the word monopolistic in the title. As a form of competition, this is closest to perfect competition and nowhere near the monopoly end of the scale. The reason for the name is that in monopolistic competition we drop the assumption from perfect competition of homogeneity of products and so each firm can develop their own 'brand' of product. This means that each firm has a 'monopoly' over their brand, but there is still a large number of firms.

The main assumptions are:

• Large number of firms - each firm has an insignificantly small share of the market.
• Independence - as a result of a large number of firms in the market, each firm is unlikely to affect its rivals to any great extent. In making decisions it does not have to think about how its rivals will react.
• Freedom of entry - any firm can set up business in this market.
• Product differentiation - each firm produces a different product or service from its rivals. Therefore each firm faces a downward sloping demand curve. This is the key difference from perfect competition. Product differentiation involves creating differences between products, either real or imagined, in consumers minds and is likely to involve various forms of non-price competition such as branding and advertising.

Examples of monopolistic competition

Petrol stations, restaurants, hairdressers and builders are all examples of monopolistic competition. Monopolistic competition is a common form of competition in many areas. A typical feature is that there is only one firm in a particular location. There may be many chip shops in town but only one in a particular street. People may be prepared to pay higher prices than go elsewhere, or they may simply prefer this 'brand' of fish and chip.

Monopoly & Oligoply

Monopoly

One or occasionally a few firms dominate the market. The others have to accept the market as established by the others. A perfect monopoly is when there is a single supplier. However, a firm gets monopoly powers as its market share edges above 25%. Some industries are natural monopolies, such as water supply and basic power generation.

Oligopoly

Oligopoly is when a few suppliers who provide the same product dominate a market. Petrol companies and the soap and detergent industry are good examples. Each firm has to be concerned about what the others in the industry will do.

Governments are concerned about both of these types of competition. Economic theory suggests that as markets become more concentrated (the number of firms in the industry falls) they become controlled by the suppliers at the expense of the consumer. As we shall see, this is not always the case. They try to regulate, or control these industries.

As was seen earlier, the very size of the firms makes it difficult for others to enter the industry (the size of the firms acts as a barrier to entry). Sunk costs are high so potential losses are high. There is no great encouragement to enter the market however good a product the firm has.

Why do some markets become concentrated and others do not?

The simple answer is growth and economies of scale. Some firms are more efficient than others, and in some industries there are much greater economies of scale than others. This has led to the formation of a number of highly concentrated industries. Examples are the oil and petrochemical industry, the aircraft manufacturing industry, airlines, soft drinks and banking to name just a few. Follow the links below to see how each industry fits the characteristics of monopoly and oligopoly.

Oil and petrochemicals

Aircraft manufacture

Airlines

Soft drinks

Banking

All the above are examples of oligopoly. Examples of monopoly are few and far between. Many natural monopolies, often state owned, have been broken up (privatised) and artificial competition (usually with regulators to control the market) introduced. Examples are electrical power, gas and the telephone service.