Markets and Market Structures

“Explain the characteristics of perfect competition, monopoly and oligopoly and consider the usefulness of these models in understanding business activity in the UK economy.”
Introduction

Definitions of • Perfect competition • Monopoly • Oligopoly

Perfect Competition: - All Firms sell an identical product - All firms are price takers - All firms have a relatively small market share - Buyers know the nature of the product being sold and the prices charged by each firm. - The industry is characterised by freedom of entry and exit.

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.

Monopoly: - Many buyers - Only one seller - e.g. not a price taker - Perfect information - Restricted entry and possibly exit

Monopoly is a market structure in which there is a sole supplier of a good, service or resource that has no close substitutes and in which there is a barrier preventing the entry of new firms into the industry.

Oligopoly: - A few firms selling a similar product - Each firm produces branded products - There is likely to be significant entry barriers in to the market in the long run which allows firms to make above average profits.- - Businesses have to take into account likely actions of rivals to any change in price and output.
An oligopoly is a market dominated by a few large suppliers. The degree of market concentration is very high (i.e. a large % of the market is taken up by the leading firms). Firms within an oligopoly produce branded products (advertising and marketing is an important feature of competition within such markets) and there are also barriers to entry. Another important characteristic of an oligopoly is interdependence between firms. This means that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions. This creates uncertainty in such markets - which economists seek to model through the use of game theory.