It is a market structure where there is only one producer of a particular good or service. In this structure there are no substitutes and the monopoly firm determines entry and exit in the firm. There is no competition in the production of a good or service thus the firm determines the prices and quantity of goods and services. For such a reason, many governments have taken the mandate of controlling monopolies to avoid consumer exploitation. The producer can decide to either over or under price a certain good for its own benefits (Robert, 2004). (Graph C-monopoly)
Graph C shows the demand curve of a firm which is a monopoly. Unlike the perfect competition, it is downward slopping. This is so because the monopoly has all the power to set the prices. The price elasticity is therefore less than one. The profit of a monopoly can be measured where the marginal revenue cuts the marginal cost. One of the major set backs of this structure is that the firms tend to become very inefficient in the production of goods and services. This is so because they know they do not have any competition so they can treat their customers the way
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On the contrary such markets do avoid the problem of dumping due to their strict regulations of entry. Examples of such firms are: Microsoft, railway and AT&T companies. They control the production of their goods and no other company is able to produce computer programs such as Microsoft (Robert, 2004). This structure is similar to that of the perfect competitive market but the difference is that the several producers have same but differentiated goods and services. There is no perfect substitution of goods and services.
Like the perfect competitive market it has several buyers and sellers. The perception of consumers is that there are no price differences of the goods and services. This gives the producers and sellers the mandate to set prices at a certain degree. Entrance and exit to this structure has low restrictions. Examples can be clothes, services offered by hotels and restaurants, shoes, toothpaste, toilet companies and so on. Examples of such industries or firms in the USA are: Aqua fresh, Colgate and Aim.
They sell toothpaste that is used to brush teeth but they all contain different chemicals and they have different prices. There is no assurance that a firm will keep up the profits in the long run because other firms coming up with better differentiated goods and services. This generally makes firms to advertise, change brand names, change packaging and market their goods in so many ways (Robert, 2004). (Graph D-short run monopolistic competition) (Graph D-long run monopolistic competition)
Graph D shows that a monopolistic competitive firm is able to make profits in the short- run because the marginal revenue is greater than the marginal cost. The firm is able to make such profits because there is no great competition. When competition begins, in the long run, the firm is most likely to lose its profits. This is because other competitive firms will copy the strategies that the firm was using in differentiating its products. At this point the firm’s profits will be zero. This is because the marginal revenue will be equal to the marginal cost.
The firm will not produce at the lowest point of its average cost curve. It will produce at a lower output level making it to reap more profits as the marginal revenue will be greater than the marginal cost (Robert, 2004). Oligopoly It is a market structure where certain goods and services are produced by very few producers. There is awareness of what each producer’s actions because they are small in number. Every firm’s decision has a great influence on the others. When a producer in this structure makes a strategic plan, he or she must put the probable responses of other firms.
Oligopolists act like monopolists when they join up and set prices and structures of markets and restrict entry or exit. Such decisions lead to formations of cartels. The government has control of these collusions to avoid consumer exploitation. Examples of such services and products can be media, airplane, tobacco and beer (Varian, 2006). (Graph E-showing oligopoly demand curve) This structure experiences imperfect competition because of the vast competition. This is shown by the demand curve that is upward and sticky.
The demand curve is said to have a kinked shape. There is relative price elasticity of price because prices of firms are constant. It is again relatively inelastic because firms will reduce prices thus conflicts in pricing. At such a point it will be wise to produce at E where the marginal cost is equal to the marginal revenue (Varian, 2006). Reference Robert S. , 2004. Microeconomics- Business & Economics: Market structures. Pp. 252-330. Varian R. , 2006. Microeconomic Analysis- Business & Economics: Markets. Pp. 76-89.