Pure & Perfect Competition

Nature: Number of sellers: MANY

Perfect competition is a market structure in which Market Entry/Exit: FREE

the following five criteria are met:
Price Taker/Maker: PRICE TAKER
1) All firms sell an identical product;
2) All firms are price takers - they cannot  Most agricultural markets are good examples
control the market price of their product; of pure competition.
3) All firms have a relatively small market  MILK- a product which is fairly similar across
share; suppliers available in almost every part of the
4) Buyers have complete information world; is widely consumed and sells at
about the product being sold and the consistent prices. If a large segment of
prices charged by each firm; and producers were hit by drought or cattle
5) The industry is characterized by freedom disease, unaffected producers would have a
of entry and exit. Perfect competition is larger measure of control over the market
sometimes referred to as "pure because the demand would remain high, but
competition". supply would decrease.

Characteristics: Price & Output Determination:

1. A large number of small firms  The buyers & sellers cannot influence the market
o This ensures that no single firm can price by increasing or decreasing their
exert market control over price or purchases or output.
quantity.  The market price of products is determined by
2. Identical Products (or Goods sold by all the industry.
firms)  This implies that the market price of products is
o Commonly termed as “homogenous determined by taking into account 2 market
product” forces:
o Buyers cannot tell which firm o Market Demand- sum of the quantity
produces a given product. demanded by each individual
3. Perfect Resource Mobility (The Freedom of organizations in the industry.
Entry into & Exit out of the Industry) o Market Supply- sum of the quantity
o Perfectly competitive firms are free supplied by each individual
to enter and exit an industry. organizations in the industry.
o They aren’t restricted by gov’t rules &  “Both the elements of demand & supply are
regulations, start-up cost, or other required for the determination of price of a
barriers to entry. commodity in the same manner as both the
4. Perfect Knowledge of Prices & Technology blades of scissors are required to cut a cloth.”
o Buyers are completely aware of  The price of a product is determined at a point
sellers’ prices, such that one firm at which the demand & supply curve intersect
cannot sell its good at a higher price each other. This point is known as the
than other firms. equilibrium point as well as the price is known as
o All perfectly competitive firms have equilibrium price. At this point, the quantity
access to the same production demanded & supplied is called equilibrium
techniques. quantity.
o No firm can produce its output
faster, better, or cheaper because of Examples:
special knowledge of information.
 Common Stock Markets
Product Attributes:  Agricultural Markets

- Standardized or homogenous with perfect

attributes

Barquin, Dana Janine Y. BSA-2 445 MICRECO [MWF 10-11]

 Monopoly

Nature: SINGLE SELLER

UNIQUE PRODUCT
It exists when a specific person or enterprise is the IMPOSSIBLE ENTRY
only supplier of a particular good. They are COMPLETE MARKET POWER
characterized by a lack of competition within the
market producing a good or service. No. of Seller: ONE

There is a single producer or seller that has control Product Attributes:

on the entire market.
- No close substitutes
Characteristics:
Market Entry/Exit: BLOCKED
1. Profit Maximizer
o A monopoly maximizes profit. Due to Price Taker/Maker: PRICE MAKER
lack of competition, a firm can
charge set price above what would Price & Output Determination:
be charged in a competitive market,
thereby maximizing its revenue.  This single seller deals in the products that
2. Price Maker have no close substitutes & has a direct
o It decides the price of the good or demand, supply, & prices of a product.
product being sold.  There is no distinction between a one
o The price is set by determining the organization constitutes the whole industry.
quantity in order to demand the (There is no difference between organization
price desired by the firm. and industry.)
3. High Barriers to Entry
o Other sellers are unable to enter the Example:
market of the monopoly.
4. Single Seller
 Utility Company providing customers with a
o One seller produces all the output for
good such as natural gas. Because building
a good or service. The entire market
pipelines, compressor stations & associated
is served by a single firm.
infrastructure is so costly, it only makes
o For practical purposes, the firm is the
economic sense for one player to service an
same as the industry.
area with natural gas.
5. Price Discrimination
o The firm can change the price &
quantity of the good or service.
o In an elastic market, the firm will sell
a high quantity of the good if the
price is less. If the price is high, the
firm will sell a reduced quantity in an
elastic market.

Sources of Monopoly Power:

- Economies of Scale
- Capital Requirements
- Technology Superiority
- No Substitute Goods
- Control of Natural Resources
- Network Externalities
- Legal Barriers
- Deliberate Actions

Barquin, Dana Janine Y. BSA-2 445 MICRECO [MWF 10-11]

 Monopolistic Competition o A firm that posts a positive net
income can have zero economic
Nature: profit, since the latter incorporates
opportunity costs.
Characterizes an industry in which many firms offer
products or services that are similar, but not perfect LARGE # OF SELLERS
substitutes. Barriers to entry and exit in the industry DIFFERENTIATED PRODUCT
are low, and the decisions of any one firm do not EASY ENTRY/EXIT
directly affect those of its competitors. All firms have SMALL AMOUNT OF MARKET POWER
the same, relatively low degree of market power;
they are all price makers. In the long run, demand is Product Attributes:
highly elastic, meaning that it is sensitive to price
changes. In the short run, economic profit is - Differentiated w/ close substitutes
positive, but it approaches zero in the long run.
Firms in monopolistic competition tend to advertise Market Entry/Exit: Relatively EASY but less free than
heavily. perfect competition

Monopolistic competition is a middle ground Price Taker/Maker: Modest control over price w/ no
between monopoly, on the one hand, and perfect collusion
competition (a purely theoretical state), on the
other, and combines elements of each. It is a form Price & Output Determination:
of competition that characterizes a number of
industries that are familiar to consumers in their day-  The firm will be in equilibrium position when
to-day lives. MR=MC. So long the MR>MC, the seller will find
it profitable to expand his output, & if MR<MC,
Characteristics: it is obvious he will reduce his output where the
MR=MC.
1. Number of Firms  In short run, the firm will be in equilibrium when
2. Product Differentiation it is maximizing profits (MR=MC).
o Because the products all serve the  Since the goods sold are differentiated & the
same purpose, there are few options concept of uniform pricing does not prevail,
for sellers to differentiate their each firm is a price maker & is in a position to
offerings from other firms’. determine the price of its own product.
o It tends to lead to heavy marketing,  Thus, the demand curve of the firm is
because different firms need to downward sloping.
distinguish broadly similar products.  Generally, the less differentiated the product is
3. Decision Making from its competitors, the more elastic the
o Implies that there are enough firms in curve will be.
the industry that one firm’s decision
does not set off a chain reaction. Examples:
4. Pricing Power
o Firms are price setters rather than  Include restaurants, hair salons, and clothing
price takers. and consumer electronics.
5. Demand Elasticity  The best example in the world of
o Due to range of similar offerings, smartphones. We are facing a huge
demand is highly elastic. competition in a monopolistic model.
6. Economic Profit o When we compare on to the
o In short run, firms can make excess smartphone manufacturers like iOS,
economic profit. android OS, windows OS? Mainly?
o However, because barriers to entry This all the 3 together provide a wide
are low, other firms have an range on smartphones.
incentive to enter the market,  Bakery- There are many bakeries in town,
increasing the competition, until but one of those bakeries can demand a
overall economic profit is zero. slightly higher price for bread because it is
o Economic profits are NOT the same the only one in a certain part of the town.
as accounting profits.

Barquin, Dana Janine Y. BSA-2 445 MICRECO [MWF 10-11]

 Oligopoly

Nature: Product Attributes:

Oligopoly is a market structure in which a small - Standardized/homogenous/ differentiated

number of firms have the large majority of market with perfect/close substitutes
share. An oligopoly is similar to a monopoly, except
that rather than one firm, two or more firms Market Entry/Exit: COSTLY
dominate the market. There is no precise upper limit
to the number of firms in an oligopoly, but the Price Taker/Maker: Quasi Price MAKER through
number must be low enough that the actions of cooperation/collusion
one firm significantly impact and influence the
others. Common Industries Overshadowed:

A duopoly is an oligopoly composed of 2 - Cable TV Services

participants. - Entertainment Industries (Music & Film)
- Airline Industry
Characteristics: - Mass Media
- Pharmaceuticals
MAIN - Computer & Software Industry
- Cellular Phone Services
1. Small number of firms - Smartphone & Computer Operating Systems
o Characterized by a few firms - Aluminum & Steel
o These handfuls of firms dominate the - Oil & Gas
industry to set prices. - Auto Industry
2. Interdependence
o Any action on the part of one firm
with respect to output, quality
product differentiation can cause a  In an oligopoly, a price cut by one firm can set
reaction on the part of other firms. off a price war.
3. Realization of profit
o Are often thought to realize
economic profit
o Whenever there are profits, there is
incentive for entry of new firms. The
existing firm then try to obstruct entry
of new firms into the industry.
4. Strategic game
o The entrepreneurs of the firms are like
generals in a war. They attempt to
predict the reactions of rival firms. It is
a strategy game which they play.

MAIN REASONS

1. Economies of Scale
2. Barriers to entry
3. Merger
4. Mutual Interdependence

(Opec: oil producer, car manufacturers)

SMALL # OF SELLERS
IDENTICAL/DIFFERENTIATED
DIFFICULTY ENTRY
LARGE AMOUNT OF MARKET POWER
Barquin, Dana Janine Y. BSA-2 445 MICRECO [MWF 10-11]