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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.

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Answer 1

There are four basic types of market structures: perfect competition, imperfect competition, oligopoly, and monopoly.

Monopoly:

A monopoly exists in areas where a firm/entity is the only (dominant) force that sells a product/service in an industry. This gives the entity enough power to keep other competitors away from the marketplace. This may be because of the industry's requirement for technology, high capital, government regulation, patents, and/or high distribution overheads.

Once Monoply is established, due to lack of competition consumers are charged higher prices with fewer alternatives. Monopoly often takes the shape of Pure Monopoly when none of the substitutes are available in the market.

Along with high barriers to entry for competing firms, companies that operate monopolies are price makers. This means they determine the cost at which their products are sold. These prices can be changed at any time.

Monopolies are only allowed to exist when they benefit the consumers.

examples: Indian railways (Government), Google, Intel, etc. (Private players)

Oligopoly:

In Oligopoly, a group of smaller firms (two or more) controls the market. However, none of them are bound from significantly influencing the industry, and they may sell products that are slightly different.

Prices in this market are moderate because of the presence of competition. When one firm sets a price, the others follow the suit to remain competitive. But if one firm drops its price for consumers, the others typically do the same. Prices are usually higher in an oligopoly than they would be in perfect competition.

Because there is no dominant force in the industry, firms may collude with one another rather than compete, which can keep other players from entering the marketplace. If they don't collude, they would be forced to open up the market to smaller firms. This cooperation makes them operate as though they were one firm. Because there must be some degree of competition in an oligopoly, this changes the market structure to a monopoly.

Example: Entertainment is a big place where oligopolies exist. This includes mass media, where a handful of companies control the market. Some of the big names include Disney, Viacom, CBS, and NBC Universal. Another area of the entertainment world is the music business, where Sony, BMG, and Universal all have a big grip on the market. Airlines also form oligopolies, where a small number of players float over the rest, keeping other competitors at bay.

Perfect and Imperfect competition:

In Perfect competition, a market structure is being controlled entirely by market forces. If and when these forces are not met, the market is said to have imperfect competition.

Theoretically, Perfect competition does not exist as it practically impossible to attain in real life

In Perfect competition, resources would be divided among companies equally and fairly in a market, and no monopoly would exist. Each company would have the same industry knowledge and they would all sell the same products. There would be plenty of buyers and sellers in this market, and demand would help set prices evenly across the board.

In order for the Market to have perfect competition, there must be:

• Identical products sold by all the companies
• An environment in which prices are determined by supply and demand
• Equal market share between companies
• Complete information about prices and products available to all buyers
• An industry with low or no barriers can entry or exit

Example: flea market and farmer market (ideal)

Imperfect Competiton occurs in a market when one of the conditions in a perfectly competitive market are left unmet. This type of market is very common. In fact, every industry has some type of imperfect competition. This includes a marketplace with different products and services, prices that are not set by supply and demand, competition for market share, buyers who may not have complete information about products and prices, and high barriers to entry and exit.

Imperfect competition can be found in the following types of market structures: monopolies, oligopolies, monopolistic competition, monopsonies, and oligopsonies.

example: McDonald's and Burger King, Automotive players like Ford and Nissan etc.

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.

A government-granted monopoly or monopoly to be served under government is a form of coercive monopoly by which a government grants exclusive privilege to a private individual or firm to be the sole provider of a good or service; potential competitors are excluded from the market by law, regulation, or other mechanisms of government enforcement.

The government can create monopolies in order to reduce the inefficiency of the market as: the scarcity of resources, reduced wealth-creation, lost government revenue, heightened income inequality, incomplete markets.The reason also can be simply as economies of scale, as well as the government, can use its power to gather influence on the market by regulation. Hence helping the country economics under fair law and governance.