There are four types of market structure:
• Perfect competition;
• Monopolistic competition;
• Oligopoly; and,
Perfect competition is characterised thus:
There are many sellers, with no one organisation dominating the market, of identical products, selling at a price that is dictated by the market. There are many buyers in the market who have perfect knowledge of the products and the alternatives available and there is little or no differentiation between different products offered by different sellers.
There are no barriers to entry into the market and sellers are able to enter and exit the market at any time and there would be no advertising costs as all products are identical and all buyers have perfect knowledge.
There is very little pure perfect competition in today’s global economy but milk and egg producers/suppliers could be said to fulfil the requirements.
Monopolistic competition is characterised thus:
There are many sellers, with no one organisation dominating the market, of dissimilar products; say, clothing retailers.
The buyers do not have perfect knowledge but they are aware of similar substitutes that are available at not-so-different prices from different sellers, and because of this, there are no barriers to entry into the marketplace which will attract new competitors into the market or encourage existing sellers to differentiate their products as much as is possible. Sellers can differentiate their product...
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...e is one single seller that has complete control over the market, therefore making that seller a ‘price-maker’ - dictating the market price, with the consumer being the ‘price-taker’ – taking the price that is dictated by the market and there are no substitutes for the product. The seller is able to earn abnormal profits as they have no competition however this may not be sustainable in the long-term as customers may not continue to buy their products. There are effective barriers to entry into the marketplace which could include government intervention, patents and copyrights, and high start-up costs.
In the UK, before privatisation, BT, British Rail and British Gas were monopolies as there were no other providers of these services. Royal Mail still has the monopoly on mail deliveries and postage stamps although there are other parcel delivery services and couriers.
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