Monopoly, oligopoly, perfect competition, and monopolistic competition

The Australian market is a diverse economic ocean – it has different species of marine life (industries), different swells (market structure) and even ‘hot’ and ‘cold’ spots (public companies). One of the key determinates to a successful national economy is the structure of its markets. The main market structures are: 1. Monopoly

2. Oligopoly

3. Perfect Competition

4. Monopolistic Competition

Each of these market structures have unique characteristics, and can be classified according to three factors. The degree of competition, the first factor, is important as it classifies markets into different market structures. It compares the relative sizes of firms, the amount of sellers (vendors) and the barriers of entry to the market. The second factor is pricing strategies. The ‘big fish’ have high power to set a price, because of their size and influence over the market. On the other hand, a smaller, less powerful business will usually have extremely little or no power to set the price. The final factor to be taken into account when classifying a market structure is the profit of a firm, and their performance compared to others (if applicable).

Every market is classifiable into one of the four market structures: monopoly, oligopoly, perfect competition, and monopolistic competition.

Monopoly:

A monopoly is a situation where one firm completely dominates the market. This is exactly the opposite of perfect competition (explained later), and it means that one firm has 100% market share. There can be several circumstances that result in a monopoly.

If only one firm selling a unique product that they have various patents or copyright on, then the company has a monopoly on the market. A monopoly also results when no substitute product is being sold, leaving the consumer able to purchase only the monopolized product. This means that the market has extremely high barriers to the entry of another firm. Monopolies are commonly referred to as ‘price setters, which means that because of their position in the market, they can set virtually any price for a good or service, and still have high demand for it, simply because no-one else is selling it. In Australia today, however, there are very few monopolies, but they still exist.

A prime example would be the water company.

In order for a healthy marketplace and therefore economy, the government places restrictions on monopolies. The main reason for this is the fact that monopolistic firms have absolute power over the pricing of their products. Without government intervention, monopolies could charge any price for their products and consumers would be forced to purchase the product due to the lack of competition. A perfect example of a government restriction on monopolistic behaviour is to place a price ceiling on a product. This means that if the company sells its product for an amount greater than the quoted price ceiling, the firm is breaking the law.

Oligopoly:

An oligopoly is a prime example of imperfect competition. They are the most common type of market structure in Australia, and they involve a few (relatively) large firms with a (relatively) large market share. The firms involved sell similar products, and the barriers to entry into the market are quite high (this explains why there are only a small number of firms).

Advertising is a key part of an oligopoly. A successful advertising campaign gets the public eye, and attracts consumers to the firm in question over those who do not advertise (at least as successfully). The key advantage of an oligopoly is that the firms involved have high price setting abilities. The most common examples of an oligopoly are in the mass media market, which includes television, radio, and newspaper publishers.

Perfect Competition:

Perfect competition in a market consists of many small firms selling identical products and services. Because there are so many firms involved, it makes no difference to the buyer where he/she purchases from. Demand is perfectly elastic and the firm is price taker – since the companies individually produce a very small percentage of the total industry output, they have no influence on the market price. They can only accept the prevailing market price. There are no barriers for entry to the industry. Any firm can enter the market and the present sellers can’t stop that firm from entering. Advertising is practically pointless in perfect competition – because the products are virtually indistinguishable from each other, the purpose of advertising is defeated. Perfect competition is a theoretical market structure. This means that in theory, it is possible, but it is not usually common practice in an economy. Australia’s fruit and vegetable market, however, would be the most similar.

Monopolistic Competition:

Monopolistic competition is a market in which a very limited number of very large firms operate, selling similar products. The main difference between the products of the companies is packaging and display. In monopolistic competition, advertising plays an extraordinarily important role – the companies need to distinguish between each others products, and come out saying that theirs is worth purchasing. Another great power in monopolistic competition is a concept known as ‘brand loyalty’. The consumer selects the brand that they prefer or appeals to them the most, and they always buy that over the competition. The best example of monopolistic competition would have to be Coke and Pepsi. Both companies release a similar beverage, both have their minor subtleties, and advertising and brand loyalty play an enormous part in their overall profit and consumption.

The basic rule in market structure is consumer sovereignty – the mentality that the consumer is God. All four market structures have their pros and cons, but at the end of the day, it is the consumer who chooses what to buy from where, and it is the government’s role to monitor and change any market behaviour that could be potentially damaging, not only to the marketplace, but to the consumer, and to the economy.