Competitive Markets, Monopolies and Oligopolies
Primary form of distinction between these three market structures has to be the number of
sellers engaged in each. Some of these structures may appear more opportunistically “fair”, but,
these structures are tightly controlled by a government that is seeking specific economic goals
for its region. For example, while competitive markets may be allowed to increase competition
within an economy, the government may favor a monopoly when it wants to keep the price of a
product under control.
Characteristics of Market Structures
The characteristics of each market structure is described as follows.
Perfect Competition or Competitive Markets
A perfectly competitive market structure is one where there are potentially infinite
numbers of buyers and sellers. What this ensures is that no single seller, single buyer or a group
may dictate the commodity price. Each participant therefore is a “price taker”. All buyers have
the willingness and ability to pay a specific price; likewise, all producers have the ability to
produce or supply the given product at a specific price (Petri, 2004).
Another characteristic of competitive markets is that it is extremely easy to enter or exit
such a perfectly-competitive market: there are zero entry barriers or exit barriers. The factors of
production are perfectly mobile in a larger time frame allowing adjustments. Such markets are
also characterized by conditions of perfect information: all consumers and producers are
perfectly aware of quality, associated price and production methods. There are no associated
transaction costs involved here when goods are exchanged. There are no differences in the
product or services offered across suppliers, ensuring homogeneity.
As far as profit maximization is concerned, in a perfectly-competitive market, firms sell
to ensure the most profit, which is where marginal costs meet marginal revenue. The setup is
such that the number of firms operational cannot go down. This is ensured by prohibiting
increasing returns to scale (or economies of scale). Lastly, property rights are well established;
what goes in the sale and rights acquired after a purchase.
In the short term, there is no productive efficiency because when marginal cost is equal to
the marginal revenue, however allocative efficiency is there (since marginal cost = marginal
revenue). The demand curve in this case for a firm is perfectly elastic. A big difference when
compared to a monopoly (or an oligopoly) is that a firm cannot, in these conditions, turn
economic profit. Therefore it can only cover production costs.
The market structure has a unique role in cases where the government wants to not
intervene in a sector or where it is impossible to serve or sell without crowd-sourcing. It is used
as a vehicle to implement free competition. Street food market in developing countries is a
relevant example, though because of the strict conditions imposed, there are no ideal examples of
perfect competition. There are no entry or exit barriers, there is considerable mobility because
buyers can move to another food seller in the vicinity, homogenous products etc.
Monopolies refer to market conditions where a singular entity: person or company
happens to be the only supplier or seller of a particular product or service. Monopoly does not
concern with control over a market, or making decisions on behalf of it. While the economic
competition is lacking, so also is a viable substitute produce or service. There could be several
reasons why the competition is excluded, however, monopolies immediately provide the
dominating company with the ability to raise prices at will. Size is typically not a characteristic
of a monopoly, though many such companies in the past had acquired large sizes.
Market interactions are typically distorted due to the market power that monopolies have.
Goods produced are fewer and prices are raised in order to achieve greater margins, using a
market skimming approach. Where government does not sponsor a monopoly, they may form
out of mergers or even naturally out of innovation. Legal provisions aim at certain behaviors
when a company is in a dominant position, but not on being in a dominant position itself.
The role of a government monopoly is that of inducing creativity by granting companies
rights to the fruits of their innovation. Other reasons why governments sanction this structure is
to foster investments in a risky venture or sustaining a domestic interest group. Tools to sanction
monopolies can be from patents, trademarks, copyrights etc. Sometimes due to the sensitivities
attached to an industry, the government may enter the business by itself and create a state-
Barriers to entry are insurmountable. These can be brought about by economies of scale,
where companies are able to produce more goods at progressively cheaper prices, capital
requirements (as with a large factory), technological superiority etc. There may also be no close
substitutes for the product. Control over natural resources and network externalities are
additional reasons for creating and sustaining a monopoly. Profits are set to be maximized, and
the price maker has control over the price of goods or service. The company becomes the
industry; depending upon the elasticity of the market, there may be more sales for less price and
Oligopolies are market structures where a small number of sellers dominate a particular
industry. The smaller number of sellers means that each of these participants are quite aware of
each other’s offerings and strategy. Any long term strategy is constituted only after taking into
account that of others (Vives, 1999).
The profit maximization condition is that production happens where marginal revenue
becomes equal to marginal costs. Such a setup is a price setter and not a price taker, because the
sellers hold power and privilege upon the industry. There are very high entry barriers here,
ensuring the small numbers of the sellers and there is obvious motivation on the part of the
sellers to keep the club restricted. These can again be from economies of scale, technological
domination, patents and copyrights and strategic partnerships among these sellers to acquire or
put out of business any startups. Of course, the government may also favor the existing players.
Because they are so few, actions taken by one affect all the others.
Other characteristics include long run profits from the price setting that these firms
engage in. However, product may be differentiated (or could be similar). Also, while there is
general awareness, there may not be perfect information. Neither sellers can know everything
about the affairs of each other, nor can consumers as regards price, cost and quality.
However what sets an oligopoly apart is the interdependence exhibited here. There is
usually a synchrony between the actions of all the players because they can all affect market
conditions. Reactions of each other are important when implementing a policy. Examples
include when increasing prices, being sure that others will follow suit to not lose business to
others and vice versa. There are also forms of non-price competition; this includes loyalty
schemes, product differentiation etc. The breakup of communism and the resulting privatization
of the Russian oil industry was an example of oligopoly, which created a handful of oligarchs.
The role an oligopoly plays is very similar to that of a monopoly, where protectionism is needed
or there are significant industry related risks, trade secrets, technological prowess needed etc
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