Question

Compare and contrast the characteristics of the following four market structures: Perfect Competition, Monopoly, Oligopoly, and Monopolistic Competition.(20points)

Answer 1

Perfect competition : This is a market structure in which there are huge number of buyers and sellers and so none of the single buyer or seller have any power over the price. They are price takers. All of them sell homogenous goods. Hence, the price is always equal to the marginal cost. If anyone tries to charge higher, the consumers would shift to other sellers. Also, since the number of sellers are so huge, there is no restriction on the entry and exit of the firms.

2. Monopolistic competition : This is a market structure in which like perfect competition there are large number of buyers and sellers. However, the key difference is that, the sellers in this case do not sell homogenous prodicts but they sell differentiated products. The sellers have a monopoly over their differentiated products and hence the name "monopolistuc competition". This, like perfect competition, has free entry and exit. However, since firms have a monopoly over their differentiated product, they can charge a price which is a little higher than their marginal cost.

3. Oligopoly : This is a market structure in which there are just a few big sellers which dominate the market. Their products can either be homogenous or be differentiated. However, there are barriers to entry in the industry, be it capital barriers, technological barriers or legal barriers. Since, there are just a few firms, they can influence the price and thus charge a price above the marginal cost.

4. Monopoly : This is a market structure in which there is just one firm which dominates the market. It itself sets the price in the market and hence is known as the price setter. Even this market structure has lots of barriers to entry, especially, governmental barriers. Since, it is just a single firm, it can charge a very high price and increase its profits.