Comparing Market Structures

	Perfect Competition	Monopolistic competition	Oligopoly	Monopoly
Number of firms	Many	Many	A few	One
Freedom of entry	Easy	Easy	Difficult	Very difficult
Nature of product	Identical/ Homogeneous	Differentiated	Homogeneous / Differentiated	Unique
Implications for demand curve	Horizontal	Downward sloping – elastic	Downward sloping – inelastic	Downward sloping – most inelastic
Average size of Firms	Small	Relatively small/ Medium	Large	Very large
Possible consumer demand	Low	Low/Medium	Medium / Strong	Strong
Profit making possibility	None	Low / Medium	Medium /Strong	Strong
Government intervention	None	None	Medium	Strong
A new example	Wheat	Optical stores	Steel	Postal Services
Control over pricing	None	Low	Moderate/ Substantial	Substantial

FOUR different market structures with graphs below comparing the demand, costs, revenue, output and profits:

Perfect Competition

At an output of QE, the average cost is C, and the average profit is equal to the distance PC.  The total profit is equal to the average profit times the quantity produced.  This is represented graphically by yellow shaded area.  Image Source Page:http://jimluke.com/teachingportfolio/examples/unit8/jimsguide.html

 

Monopolistic Competition

D is an elastic demand curve with its associated marginal revenue curve MR.  ATC and MC are the normal U-shaped cost curves.  The area Pbq0 represents total revenue.  Similarly, Caq0 represents total costs.  If we subtract costs from revenue, we get an economic profit, which is represented by shaped area PbaC.

Monopoly

We show the firm producing output 20 quantity, the level of output where MR = MC. At that level of output the firm sells its product for $10 per unit.   This means the firm's total revenue is 10 x 20 = 200. At 20 units of output ATC = 7,  so total cost is 20 x 7 = 140. So profit = TR - TC = 200 - 140 = 60. Or average profit is 10 - 7 = 3 per unit, so profit is 20 x 3 = 60.

Image Source Page: http://www.econweb.com/Sample/Monopoly/ProfitMax13.html

                           

 

Oligopoly

The discontinuity in the marginal revenue (MR) curve is the result of the kink in the demand curve.  The MC is the original marginal cost curve. Quantity Q is the profit-maximizing output that results in price P. 

Image Source Page: http://www.businessbookmall.com/economics_26_oligopoly.html

 

          

Defining Oligopoly and Game Theory

Oligopoly is a common market structure.  It is an industry mad e up of a few large firms, which means that the concentration ratio is high.   Firms in the industry, each would realize that by producing more it would drive down the market price.  So each firm realize that profits would be higher if it limited its production. In this case, these companies will engage in collusion.     An agreement among suppliers to set the price of a product or the quantities each will produce.   And the strongest form of collusion is a cartel – an agreement of several firms that increase their profits by telling each other’s how much to produce.  Cartel work to the advantage of their members only if there is no cheating among the participants.

When the decisions of firms significantly affect other’s profits, they are in a situation of interdependence.  The study of behaviour in situations of interdependence is known as game theory.  Game theory was first developed by economists John Neumann and Oskar Morgenstern in the 1940s to analyze strategic behaviour.   The profit earned by an oligopolist, is that player’s payoff.  A payoff matrix shows how the payoff to each of the participants depends on the actions of both.  A matrix helps us analyze interdependence.

I think the game theory is consistently in use in the current economy. The world of oligopoly is a struggle between cooperating and competing.  It pays for oligopoly firms to cooperate because that is how they can make the most joint profits.  But even when they cooperate, there is still the incentive to compete and outdo the rival, which could result in even greater individual profits for one of the firms.