Professional Documents
Culture Documents
Prepared by:
Noora Muhamed Ahmed Yasser Magdy Ali
CHICHAKTHAIWORN MN GSANGMA
CHICHAKTHAIWORN
M SA MA
1
Index:
Abstract page… 3
Introduction page… 4
Purposes page… 5
Literature review page… 5
Prefect compatation market page… 6
Characteristics page… 6
Advantages page… 9
Disadvantages page… 10
Example page… 10
Characteristics page… 12
Advantages page… 14
Disadvantages page… 15
Monopoly page… 15
Example page… 16
Characteristics page…16
Advantages page… 18
Disadvantages page… 19
Oligopoly page… 19
Characteristics page… 20
Advantages page…21
Disadvantages page… 22
Example page… 22
Conclusion page… 23
References page... 24
2
Abstract:
In this paper weI analyzed market four structures, and differentiated
between them, theses structure includes the Perfect competition market
structure which means many sellers and buyers, no barriers to entry, highly
competitive and homogenous products, And the Monopolistic competition
market structure which means many sellers and buyers, low barriers to
entry, high selling cost, competitive level is high yet lower that the perfect
competitive markets and similar products but not perfect substitutes.
Monopoly market structure which means the one seller of a product, and
high barriers to entry. Finally, Oligopoly market structure more than two
sellers, the sellers action effects one another, and high barriers to entry yet
lower than monopoly markets.
So, as this research paper aimed at analyzing and clarify the four market
structure, we differentiated the market structures by three main
characteristics which are the number and size and the effect of buyers
and sellers, the natural of the product, and competition level in these
market structures.
We also explained each market structures’ advantages and
disadvantages, and we’ve also illustrated some examples.
3
Introduction:
In this paper we’re going to discuss market structure as one of
microeconomics topics, market structure usually implies the degree of
competition or the monopolistic power in the markets.
Market structures in economics have four types with different degrees of
competition from very competitive markets to monopoly (absence of
competition), and they function around the world, each one of them has
particular characteristics and features, which are applied upon the firms
functioning in this market.
These four types are perfect competition, monopolistic competition,
monopoly, and oligopoly.
And studying market structure has a great importance in understanding
how firms behave according to the degree of competitions and the number
of buyers and sellers, therefore we are going to take every and each one of
them and show it traits and features and how firms operate under every
structure.
4
Purposes:
This paper aims to clear and analysis the four market structures and
differentiate them in order to have a better understanding of firms’
behavior and market structures in the economy.
Literature review:
In order to study this subject, we studied and read several previous
books and studies that share the same subject to have a better
understanding, such as:
(Market structure) by (Ilya Malyavin) written in 2014 this paper contained
overview about market structures’ behavior in different cases, and also
studies the new Zealand markets looking for an example of monopolistic
competition, thus the paper stated that the wall/floor tiles and plumbing
wares in new Zealand has the monopolistic competition structure.
(marker structure and entry: where’s the beef?) Research paper by
(Otto Toivanen and Michael Waterson) 2001, this paper aimed to track
and study the effects of each market structure on entry the market, and
it’s stated that the presence of product differentiation and market power
would increase the profits, yet make it difficult for new firms to enter the
market.
(Granular Search, Market Structure, and Wages discussion( paper
series by )Gregor Jarosch, Jan Sebastian Nimczik and Isaac Sorkin,
2019, this paper mainly aimed at the relationship between the wages of
the labors and market structure, and how market structure is effected by
the labor and the nature of the product, and by creating a market model
they stated that the markets power based on size may reduce the
wages.
5
1- Perfect competition market1
It's called a perfect competition market when it's available on very large
number of buyers and sellers and all of them that engaged in selling and
buying products without any invented restrictions and having a quite good
knowledge of markets.
So, the perfect competitive market is the market with absent of
monopolistic elements, in this market structure the prices are determined
by the market demand and supply forces and they are absolutely free to
enter this industry or exit from it as well.
1
Chand, Smriti, Market structure: Perfect competition, Definitions, [available online]. retrieved 14 May 2020
http://www.yourarticlelibrary.com/economics/market/market-structure-meaning-characteristics-and-forms-
economics/28736
2
Check previous reference.
6
right to enter or exit the industry with no barriers. Thus, each seller
has full freedom to enter or exit the market.
3- identical Product:
All the firms produce a homogeneous product and sell it so that the
buyer can choose any product from any seller, the individual can buy
any product he prefers from many firms.
5- maximization of profit:
The main goal of any firm that maximize its profits, to maximize the
profit the firms set (MR=MC) marginal revenue equal marginal cost.
In the short run the firms can make economic profits, economic loss
or zero, when the price is less than the average this mean the firm
making loss but when the price greater than the average firm is
making a profit, in the perfect competitive market are able to reach
super-normal profits as shown in the figure 1-1
Figure 1-1
Shows the supernormal profit in the perfect competitive market
7
But In the long run as the firms that make a profits, more firms want
to enter the market and when this happens it will make the industry
supply curve shifts to the right and the equilibrium price will fall, the
profits will decrease until it reach zero.
When the prices goes down and become lower than average price,
the firms will start losing which will make this firms leave the market,
thus more firms leave the market, and it will make change on supply
curve and shift it to the lift, prices will rise up and firms profit will
increase until no firms gain losses and it reach zero.
In sum, the perfect competitive market in the long run do not have
any economic profit.
6- pricing decision:
The price in this market is determined by the markets power,
therefore the seller in this market are price taker, not price maker,
they have to accept the market price.
When any firm rise the price of its product, the buyer will simply stop
buying from this particular seller and buy the product from other
sellers with low price so the firms can't have an independent price.
It means that firms can sell its productsat the ruling market price only
because the number of products and sellers a very large.
8
The goods should be free to move to those places where they can
get the highest price
2- freedom to choose
in perfect competitive market any one can enter the market and exit
from it without any limits to make profits, this freedom is resulting
from the large number of companies make the consumer choices
huge and the consumer is able to choose what good to be
purchased.
3
Mohenjo, Destem, (2020), Market structure: Perfect competition, ADVANTAGES OF PERFECTLY COMPETITIVE FIRM, [available online].
retrieved 14 May 2020
https://www.academia.edu/13256406/ADVANTAGES_AND_DISADVANTAGES_OF_PERFECTLY_COMPETITIVE_FIRM._ADVANTAGES_OF_PERFECTL
Y_COMPETITIVE_FIRM
9
Disadvantages of perfect competitive market4
1- Principles are not serviceable:
There are many principles can’t be used in real life like marginal
revenue equal marginal cost (MC=MR) in the businesspeople Either
they do not know it, or they can’t be applied
2- Time Period:
In the perfect competitive market firms will make profits just in short
run because it will make change on prices and make supply curve
shift to the lift and make profits, but in long run profits cannot be
guaranteed due more firms will enter the market and make supply
curve shift to right and start loss.
Example5
Agriculture market is a great example of perfect competition, this market
meets many of the perfect competition markets such as the following: any
one can enter the market and their main goal is maximize the profit, huge
number of buyers and sellers, the prices change by marker forces (supply
and demand), and they don’t spend any money on advertising.
4
Mohenjo, Destem, (2020), Market structure: Perfect competition, DISADVANTAGES OF PERFECTLY COMPETITIVE FIRM, [available
online]. retrieved 14 May 2020
https://www.academia.edu/13256406/ADVANTAGES_AND_DISADVANTAGES_OF_PERFECTLY_COMPETITIVE_FIRM._ADVANTAGES_OF_PERFEC
TLY_COMPETITIVE_FIRM
5
Shinn, Joseph, (2020), Market structure: Perfect competition, Example, [available online]. retrieved 14 May 2020
https://study.com/academy/lesson/perfect-competition-definition-characteristics-examples.html
10
3- Monopolistic competition6 :
Monopolistic competition model describes a mutual market structure
between the perfect competition and the monopoly, where every farm in
this industry sells a similar, yet somewhat different products.
The term monopolistic competition was first characterized by English
economist named Joan Robinson, and American economist named Edward
Chamberlin, back in 1930.
This structure involves plenty of firms that sell products that are unique in
some way, which also can be referred to as imperfect competition.
In this structure every firm tries its best to make its product unique in every
possible way this process is called differentiated products.
So, the firms have many ways to differentiate its products such as tending
to have a heavy marketing, but there are few ways to make the products
various, in fact most customer can’t tell the difference between products,
yet they tend to have favorite brand (specific firm) due to advertising and
other ways of differentiating products.
Example7:
A lot of small business works by the terms of monopolistic competition such
as restaurants, they all offer different meals, yet they compete for the same
consumer (customer), and restaurants market is a great example of
monopolistic competition, it’s almost has most of the typical monopolistic
competition structure features, therefore this market has a large number of
sellers, very low barriers to entry and each restaurant enjoys independent
behavior.
6
Monopolistic competition, [available online]. retrieved 14 May 2020
https://www.britannica.com/topic/monopolistic-competition
7
BOYCE, PAUL (2020), Monopolistic Competition Definition | 8 Characteristics | 7 Examples, [available online]. retrieved 15
May 2020 https://boycewire.com/monopolistic-competition/
11
There are many characteristics of the monopolistic
competition, the following are the main features of it8:
1- Numerous numbers of small sellers:
The number of sellers in monopolistic competition is large. They are
many sellers and small enough, so that none of the sellers has
control on the total output, and no seller can effect on the sales of
other sellers in this market by making any changes in his own “price-
output” policy, thus every seller follows an independent unique
policies and actions.
2- Product Differentiation:
This feature is one of the most important features, this shows how
can every product differ than the other similar products, which make
every firm has an absolute monopoly on its own product.
So, in this market products are close substitutes but not perfect one,
thee products can be differentiated from one another by some
characteristics such as trade names, design, colors, and so on.
4- selling costs:
Is the cost that the firm pay to be known to the buyers which helps in
differentiate products. It’s refers to the expenses that firms spend on
marking, advertisement and sales promotion.
The firms May spend money on campaigns and give away and other
things to convince the customer that its product is better than the
competitors’ product in some way.
8
Chand, smriti, 7 Most Important Features of Monopolistic Competition, [available online]. retrieved 14 May 2020
http://www.yourarticlelibrary.com/economics/7-most-important-features-of-monopolistic-competition/9154
12
5- consumer knowledge:
Unlike the perfect competition the consumers don’t have perfect
information and knowledge about the market conditions, in addition,
it’s difficult for consumer to actually know the difference between the
products due to the selling cost spent on marketing, thus the
consumer tends to prefer one product over another even if there is an
equal quality less priced product, yet the consumer have relatively
complete information about some features of the product such as
prices and the prices of the competitor firms in the market.
6- Independent behavior:
Due to the large number of sellers and the small size they have,
which also make their changes in their policies ineffective in the
market as whole as we mention earlier, so every seller has his own
independent behavior.
7- pricing decision:
each firm has its own amount of controlling power over the price and
it depends upon the strength between the buyers and the firm, in this
market structure firms are price makers.
9DEMAND CURVE UNDER MONOPOLISTIC COMPETITION, [available online]. retrieved 14 May 2020
https://homework1.com/microeconomics-homework-help/demand-curve-monopolistic-competition/
13
figure 2-1
shows that demand curve slopes downward.
9- profits
the firms -naturally- seeks to maximize profits, so in the sort-run the
profit is maximized when the marginal revenue equals the marginal
cost (MR=MC).
And in the long-run this profit encourage more firms to inter the
industry, when more firms inter, the profits shrink, due to increasing
supply, and becoming more than the demand (demand curve shifts to
the left), thus the firms finds itself forced to lower the price, and they
go back to normal profit.
1- Competition:
It’s an active competitive market which creates a space for
creativity, that’s because of the low barriers to enter this market,
this structure ensures that no one firm take all the control over the
whole market as the monopoly structure.
10
(2013), Advantages of Monopolistic Competition, [available online]. retrieved 15 May 2020
http://howestudy.blogspot.com/2013/09/advantages-of-monopolistic-competition.html
14
2- Advertisement:
On the bright side of advertisement there are many things such as
giving the consumer more knowledge -if it wasn’t false
advertisement- about more products, and wider his point of view to
help the consumer to choose from the many options in this market.
3- Quality:
Due to the active competition the firms tend to increase products’
quality and try to show the products’ pros to the consumer through
advertising.
Disadvantages11:
Monopolistic competition also has many disadvantages such as the lack of
efficient allocate of resources which leads to loss in the deadweight, also
the firms in these structure don’t reach the perfect quantity supplied –
number of quantity produced which reduce the cost of producing the unit-
due to the excess capacity as one more result for inefficiency.
3-Monopoly:
Definition12:
The word monopoly; consists of two parts mono which means one, and
poly which means sell, so the term itself mean one sells, or by other words
the one seller for a good or a commodity.
11
pachori, shivani,7 Main Disadvantage of Monopolistic Competition, [available online]. retrieved 15 May 2020
https://www.shareyouressays.com/knowledge/7-main-disadvantage-of-monopolistic-competition/116528
12
Kummar, Manoj, Monopoly: Meaning, Definitions, Features and Criticism, [available online]. retrieved 14 May
2020 https://www.economicsdiscussion.net/monopoly/monopoly-meaning-definitions-features-and-
criticism/7268
15
There are many types of monopoly such as simple monopoly, pure
monopoly, natural monopoly, and we are going to define the most common
types of monopoly such as13:
• Pure monopoly market is a market with only one seller (supplier) of a
particular product, in this market itself becomes the industry, but pure
monopoly is not found in the real world.
and because of regulation purposes, in real life we consider a market as
monopoly market when a single firm or seller has control over 25% of the
market or more.
• A natural monopoly market structure is caused by natural advantages
such as a unique location.
• State monopolies, this kind of monopoly is when the state itself has
the full ownership of some industry, and it’s the only producer of
some commodity
Example: 14
There are in fact few examples of monopoly, such like Microsoft which is
software and manufacturing company, and holds over than 75% of the tech
space that makes it a virtual monopolist in this market.
Characteristics: 15
There are many characteristics for monopoly, following ones are found
normally in monopoly markets structure:
1- barriers to entry:
13 BOYCE, PAUL, (2020), 3 Types and 7 Causes of Monopoly’s, [available online]. retrieved 14 May 2020
https://boycewire.com/types-and-causes-of-monopoly/
14
Monopoly Examples, [available online]. retrieved 16 May 2020 https://www.educba.com/monopoly-examples/
15
Agarwal, Prateek, (2019), Monopoly Market Structure, [available online]. retrieved 15 May 2020
https://www.intelligenteconomist.com/monopoly-market-structure
16
The barriers to entrance the monopoly market are significant, these
barriers are made by the monopolist, thus these barriers guarantee to
the monopolist to have control over the market. Which implies that
there’s no different between the firm and the industry.
2- Profits:
As we formally know, maximizing the profits happens when MR=MC,
maximization the profit depends upon the degree of competition in
general, and in the case of pure monopoly the degree of competition
is zero, so monopolies are able to maintain their profits at
“supernormal” level in the long run as shown in figure 2-1 16
Monopolies with no substitution or a close replacement can rule the
greatest monopoly pwer.
.
figure 2-1
this shows the super normal profits in the monopoly market
3- Pricing decision:
17
The monopolists are able to decide the price of their product due to
holding on the power of the market, which making them able to be the
price maker.
The demand curve under this market slopes down ward to the right,
which means the seller have the ability to sell more at lower prices,
due to the nature of the monopolist that he is the price maker he sets
the price where he gets maximum advantage, yet he can’t select the
price and the output level, if he chooses to select the output level
then the price is determined by the demand curve, and vice averse.
4- Lack of substitutes:
Under the monopoly market structure, it’s one firm that has control
over the market and producing a good which is often unique and has
no close substitutes.
5- Elasticity:
The producer has full control over his supply; hence the elasticity of
demand is zero
17
Carare,Petru,(2011),Monopoly: Advantages and Disadvantages, , [available online]. retrieved 16 May 2020
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1787089
18
Because of the nature of the monopoly market it will always gain
demand from its customers, which make it more likely to survive
economic crisis such as depression.
1- High prices
The seller May set really high prices and the customers in this
market will have no other option but to buy the product at this
high price due to the lack of substitutes and the lack of
competitors.
2- Price discrimination:
The seller May set different prices for different customers.
3- Quality of goods
Due to the lack of competitive firms, monopolist can provide low
quality goods to save cost, and there will be no scale or other
close substitute good that would help customers to rank the
quality or the price of the good.
19
4- Oligopoly18
When there are small number of firms in the market selling different or
homogenous products, if one of these few firms want to do any action this
will affect the others
We can differentiate the types of monopoly as follows:
monopoly is one firm and duopoly are two firms, but oligopoly are two or
more firms, there is no limit to count the number of firms in Oligopoly but
the number must be low enough to make a different in other firms if one of
them do any action.
when oligopoly industry produces homogeneous product that’s called (pure
or perfect oligopoly) and when oligopoly industry produces different
products it’s called (imperfect or differentiated oligopoly)
18
Chand, Smriti, Market structure: Oligopoly, Definitions, [available online]. retrieved 14 May 2020
http://www.yourarticlelibrary.com/economics/market/market-structure-meaning-characteristics-and-forms-economics/28736
19
Chand, Smriti, Market structure: Oligopoly, characteristics, [available online]. retrieved 14 May 2020
http://www.yourarticlelibrary.com/economics/market/market-structure-meaning-characteristics-and-forms-economics/28736
20
2- Advertisement:
Firms spend too much on advertisement and customer services
because the sellers’ product depends on how good other sellers’
products
Prof. Baumol say that “Under oligopoly advertising can become a life
and death matter.”
Therefore, any firm in oligopolist market must spend on advertisement,
thus his competitor displays an advertisement in order not to be ignored
by buyers.
4- Price stagnation:
In this market every firm involve a specific price for products, if a
company reduces the price of its product the rest of the companies will
act by lowering their prices, leading to a price war.
On the other hand, if a company increases its prices in order to increase
profits, the competing companies will not follow them, and therefore no
company will reduce or raise their prices in this market.
advantages of oligopoly: 20
1- simplifies the market for consumer:
20 Natalie, Reguli, (2019), Market structure: Oligopoly, Advantages, [available online]. retrieved 14 May 2020
https://connectusfund.org/oligopoly-advantages-and-disadvantages
21
because of small number of firms, it will be very limited products in
the market and different firms May sell similar products, which mean
simpler choices for customers.
Disadvantages of oligopoly21
Because of small number of huge firms’ competition that make it difficult for
small firms to inter the market, and make the customer choose between
few product choices, Also the small number greatly reduces innovation.
This can also negatively affect the customer because if these firms decide
to raise prices, they will force buyers to buy at higher prices.
Example22
Operating systems for smartphones market is a great example of oligopoly
market that have leader companies lead the market like apple, windows
and google android that spend to much on advertisement and customer
services and this market don’t have barriers to entry as much as monopoly
but it’s difficult to any firm to inter this market, any company of them want to
take any action or price change other companies will take counter action.
21 Natalie, Reguli, (2019), Market structure: Oligopoly, Disadvantages, [available online]. retrieved 14 May 2020
https://connectusfund.org/oligopoly-advantages-and-disadvantages
22 Leslie, Kramer, (2019), Market structure: Oligopoly, Example, [available online]. retrieved 14 May 2020
https://www.investopedia.com/ask/answers/121514/what-are-some-current-examples-oligopolies.asp
22
Conclusion:
In conclusion of this research paper we are able to differentiated the
four market structures, aware of their main characteristics, and
examples, and we can analyze how firms behave under each one, in
the following table (table 1-1) 23 we made a brief comparison between
the four structures as a conclusion of our research paper.
Table 1-1
23
Key Summary on Market Structures, [available online]. retrieved 17 May 2020
https://www.tutor2u.net/economics/reference/key-summary-on-market-structures
23
References:
1- Chand, Smriti, Market structure: Perfect competition, Definitions, [available
online]. retrieved 14 May 2020
http://www.yourarticlelibrary.com/economics/market/market-structure-meaning-
characteristics-and-forms-economics/28736
2- Mohenjo, Destem, (2020), Market structure: Perfect competition,
ADVANTAGES OF PERFECTLY COMPETITIVE FIRM, [available online].
retrieved 14 May 2020
https://www.academia.edu/13256406/ADVANTAGES_AND_DISADVANTAGES_
OF_PERFECTLY_COMPETITIVE_FIRM._ADVANTAGES_OF_PERFECTLY_C
OMPETITIVE_FIRM
3- Mohenjo, Destem, (2020), Market structure: Perfect competition,
DISADVANTAGES OF PERFECTLY COMPETITIVE FIRM, [available online].
retrieved 14 May 2020
https://www.academia.edu/13256406/ADVANTAGES_AND_DISADVANTAGES_
OF_PERFECTLY_COMPETITIVE_FIRM._ADVANTAGES_OF_PERFECTLY_C
OMPETITIVE_FIRM
4- Shinn, Joseph, (2020), Market structure: Perfect competition, Example,
[available online]. retrieved 14 May 2020
https://study.com/academy/lesson/perfect-competition-definition-characteristics-
examples.html
5- Monopolistic competition, [available online]. retrieved 14 May 2020
https://www.britannica.com/topic/monopolistic-competition
6- BOYCE, PAUL (2020), Monopolistic Competition Definition | 8 Characteristics |
7 Examples, [available online]. retrieved 15 May 2020
https://boycewire.com/monopolistic-competition/
7- Chand, smriti, 7 Most Important Features of Monopolistic Competition, [available
online]. retrieved 14 May 2020 http://www.yourarticlelibrary.com/economics/7-
most-important-features-of-monopolistic-competition/9154
8- DEMAND CURVE UNDER MONOPOLISTIC COMPETITION, [available online].
retrieved 14 May 2020 https://homework1.com/microeconomics-homework-
help/demand-curve-monopolistic-competition/
9- (2013), Advantages of Monopolistic Competition, [available online].
retrieved 15 May 2020
http://howestudy.blogspot.com/2013/09/advantages-of-monopolistic-
competition.html
10- pachori, shivani,7 Main Disadvantage of Monopolistic
Competition, [available online]. retrieved 15 May 2020
https://www.shareyouressays.com/knowledge/7-main-disadvantage-
of-monopolistic-competition/116528
24