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An economy can be characterized by different market structures. The most common structures that inform the structure of most economies are the perfect competition, monopolistic competition, oligopoly, and monopoly.
Perfect Competition Structure
In this kind of structure, competition is primarily between large numbers of small firms, implying that a single firm does not hold significant market power. The industry in a perfect competition produces the socially optimal levels of input. Perfect competition operates on a number of assumptions that include all firms involved selling homogenous goods, maximization of profits by all firms, facilitated free entry and exit to the market, and the lack of consumer preferences (De Quidt, Fetzer, & Ghatak, 2018). The tenets that anchor perfect competition imply that it is difficult to realize. However, only the stock market displays a realistic example of perfect competition.
Monopolistic Competition Structure
Monopolistic competition entails the competition for the market by a large number of small firms. Unlike in the perfect competition, monopolistic market structure involves businesses that deal in a similar line of products though slightly differentiated (Pe’er, Vertinsky, & Keil, 2016). The differentiation is responsible for the degree of market power and the charging of higher prices. The monopolistic structure assumes that consumers have certain preferences and that the market allows free entry and exit. Additionally, all businesses involved maximize profits and all the firms sell differentiated products (Auer & Schoenle, 2016). Even though these assumptions are close to reality, this market structure does not lead to socially optimal level of output since the firms have more power, thereby able to influence market prices. The cereals market is a good example of monopolistic structure because of the presence of many differentiated brands such as Apple Jacks, Cap’n Crunch, and Froot Loops among many others.
Oligopolistic Market Structure
In oligopoly, the arrangement is such that a small number of firms dominate the market. Consequently, there is limited competition. In this case, the firms have the option of competing against each other or an option to collaborate. The collaboration between these firms makes them to have collective market power that they can then use to regulate profit (driving them up) and maximize on profit. In the oligopolistic structure, it is taken that the individual oligopolies can set prices, products can be either differentiated or homogenous, the market is strictly dominated by a few firms, all firms maximize profit, and there are barriers to entry and exit (Weller, Kleer, & Piller, 2015). Oligopolies mostly have between three and five dominant firms, for example in the gaming consoles market where the three dominant companies Sony, Microsoft, and Nintendo all have significant amount of market power.
Monopoly Market Structure
A monopoly refers to a situation where a single firm controls the entire market. Consumers do not have alternatives, implying that the dominant firm has the highest possible level of market power. This situation ensures monopolies have the ability to reduce output while increasing prices to maximize profits (Elfenbein, Fisman, & McManus, 2015). High barriers to market entry characterize the market and are more pronounced in the monopoly than other structures. Additionally, the monopolist maximizes profit and sets the prices. In the U.S., Monsanto is a monopolist because it controls 80% of all corn harvested in the country by trademarking it.
In sum, the four dominant market structures are perfect competition structure, monopolistic competition, oligopoly, and monopoly. A market structure is informed by the number of firms and the alternatives that consumers have.
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