A market structure are the characteristics of a market that significantly affect the behavior and interaction of buyers and sellers (Cabiya-an, 2014). This essay will describe the 4 market structures; perfect competition, monopolistic competition, oligopoly and monopoly. I will compare and contrast the market structures in relation to benefits and costs to the consumer and producer.
According to Sloman (2013), perfect competition is the most extreme market structure. The conditions include there being many firms, freedom of entry into the industry and the firm producing homogeneous products; each frim selling identical products e.g. milk (Griffiths, 2005). There must be high supply and demand to ensure no one has greater market power, the producer and consumer have perfect knowledge and lastly there is no power to influence market price - it is a price-taker (Sloman, 2013). Examples include; street vendors in developing countries, and agricultural markets selling groceries (Worthington et al., 2005).
In the short-run firms experience supernormal profits or losses, in the long-run the supernormal profits encourage firms to enter the market. This shifts the supply curve to the right, lowering price. The firms making losses leave the market, which shifts the curve to the left and raises price. Allowing the rest of the firms to earn normal profits, as shown in Figure 1&2.
The second market structure is a monopolistic competition. The conditions of this market are similar as for perfect competition except the product is not homogenous it is differentiated; thus having control over its price. (Nellis and Parker, 1997). There are ma...
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...are linked to price, both markets have higher prices in comparison to competitive market structures. This is to maximise their profits which would lower economic welfare and consumer surplus. A difference with both of these markets is the product being a substitute. As a monopoly has no substitutes, consumers have an issue due to the firms in the market being able to exploit consumers by charging higher prices. In comparison, firms in an oligopoly market have fewer substitutes. This is why the firm engages with non-price competition in order to promote product differentiation. The consumer would benefit as they would receive quality products for a lower price.
Each market structure has a different numbers of firms, freedom of entry, nature of product and implication on the demand curve for the firm which also has a benefit and a cost to the producer and consumer.
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