Types of Competition
Economic theory usually differentiates across the four major types of market structure: monopoly, oligopoly, monopolistic competition, and perfect competition. Although the list of market structures can be virtually unlimited, these four types are considered to be the basis for understanding the principles of market performance in different market conditions. Each of the four types of market structures possesses its benefits and drawbacks. In any of these markets, an entrepreneur can develop a strategy appropriate for conquering a part of the market niche.
Although for many entrepreneurs monopoly seems an excellent choice (no competitors and full control over the product and its price), in reality it is monopolistic competition that provides entrepreneurs with sufficient stimuli for growth, does not limit them in their desire to manage the types of products they manufacture, as well as the prices they want to establish for their customers. The term “market structure” usually implies the way markets are organized.
The level of competition, the number of firms-participants, the quantity and the assortment of products offered by firms – all these are used to describe several specific types of market structure. In economic theory, markets are usually divided across the four different categories: monopoly, oligopoly, monopolistic competition, and perfect competition. To begin with, monopoly is a market structure, which comprises only one seller; monopoly usually covers only one specific business or one specific industry. Certain countries and certain laws define monopoly as covering 25% and more of one specific market.
Certainly, under monopoly conditions firms are more likely to maximize their profits: they possess full control over what they produce and can establish any price they deem necessary for each type of products sold. Also, they are given enough opportunities to invest in new products, but due to the lack of competition, consumers do not have any product choice. They also have but to pay higher prices for these products. With the lack of competition, firms do not need to optimize their costs and thus they do not seek to improve their efficiency; nor do they have enough stimuli for innovation.
In this context, an oligopoly looks like a modified form of market structure, where the market is dominated by several large manufacturers (suppliers). Monopoly and oligopoly are similar in that they pose serious barriers to entry. With the high degree of market concentration, oligopolistic firms produce only branded products. In distinction from monopoly, interdependence of firms is an essential feature of oligopoly – in any market action, a firm must be able to predict and account possible reactions of other firms within the market. As such, game theory and uncertainty govern the major processes in oligopoly.
It should be noted, that oligopoly also bears some features of monopolistic competition – the third form of market structure in economics. Both sell similar products and both promote profit maximization among firms. However, in monopolistic competition barriers to entry are non-significant or are absent at all: any firm that views the industry attractive enough can enter the market and fight for its market niche. Also, and in distinction from oligopoly, in monopolistic competition a firm cannot become a price taker, because all firms have market power and the number of such firms can be virtually unlimited.
In this context, monopolistic competition is different from perfect competition, in which all firms are price takers and own a relatively small market share. “Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared. The industry that best reflects perfect competition in real life is the agricultural industry”. In the context of perfect competition, all firms sell similar (identical) products; they are all price takers and possess a small market share.
All buyers also possess the fullest information about the nature of the product and the prices each market player charges. In perfect competition, no barriers to entry or exit exist, and firms are free to move across their markets. Certainly, perfect competition seems a perfect choice for customers, while monopoly will seem like a perfect choice for entrepreneurs – no competition, full price control, and full control over the product assortment. However, as an entrepreneur, I would rather choose monopolistic competition. My choice is justified by several reasons.
Fist of all, monopoly prevents entrepreneurs from entering the market, while monopolistic competition markets are free for entry, and as an entrepreneur I may enter any market I deem appropriate and effective in terms of maximizing my profits. Second, monopoly does give some control over prices and product assortment, but in the current world, customers always seek to diversify the range of products they use. Monopoly does not leave any chance for differentiation, and as an entrepreneur I will always want to have several different products that will be sold to several different groups of consumers.
Finally, it is due to the fact that competition drives innovation and gives me sufficient stimuli for growth that I can make my business grow. As such, in conditions of monopolistic competition I may have fewer opportunities for maximizing my profits for the sake of full control over prices and assortment, but I am more confident that my business will grow for the account of better customer satisfaction and improved innovation. Conclusion In terms of market structure, economic theory usually differentiates between the four different categories: monopoly, oligopoly, monopolistic competition, and perfect competition.
Although monopoly seems a perfect choice for entrepreneurs due to the full control over products, prices, and serious barriers to entry, as an entrepreneur I would prefer operating in conditions of monopolistic competition. This market structure does not prevent me from entering the market. I have sufficient opportunities for innovation and growth. Also, there is a possibility to differentiate the range of products in order to satisfy several different groups of consumers. Although with a smaller market share, monopolistic competition can give me a sense of stability over long-term periods.