Market Structures

Market Structures

Perfect Competition

According to economic theory, the term 'perfect competition' describes a market environment where none of the participant businesses are powerful enough to influence and impact the prices of homogenous products (Solow, 1999). Since the conditions that govern a perfectly competitive market are strict, perfect competition is considered to be rare in today's world. There are many key characteristics that describe a perfect competition. Some of these are mentioned below (Solow, 1999):

Perfect knowledge is the norm and time lags or information failures are very rare. Knowledgeable is available to the participant businesses readily and freely, suggesting that the concept of risk-taking is not common.

Barriers to entry and/or exit are minimal in a perfectly competitive market.

Businesses operating in a perfect competition produce homogenous and similar products and these are not branded.

Units of input (labor for instance) are homogenous too.

A single firm operates as a price-taker that does not possess the capacity to influence market conditions or product price and prices are set after examining industry trends.

The number of firms operating in a perfectly competitive market is considerably high.

Government regulation is not required other than to increase the competitiveness in the market.

It is only in the long run that the businesses are able to make 'normal' profits while they commonly make abnormal profits in the short run.

In perfect competition, businesses set the price of products or services after examining the leading trends that are prevalent in the market (Solow, 1999). For example, the tastes and preferences of the consumer may be one of the major factors that determine the price of a product or service while evolving market trends also play a pivotal role in setting the price of the product.

The products in a competitive market are generally homogenous and bear similar characteristics. This is to say that the products do not have a unique selling point and they are not branded (Metzger, 1978). Because the concept of perfect competition assumes that that an individual firm produces too little relative to the overall market to make any difference in price, the demand curve of perfect competition is horizontal.

Another important concept to remember in perfect competition is that of profit maximization. In perfect competition, the profit maximization point is achieved when the participant businesses sell at a level where marginal costs meet marginal revenue (Metzger, 1978). This leads to maximization of profits. An example of perfect competition is in the case of a market that consists of a lot of street vendors. This is because the vendors sell similar products and there are practically no barriers to entry or exit.

Monopoly

The term 'monopoly' defines a situation where a single business entity is in command of the whole market or a major part of it for a specific product or service that it provides. According to its economic definition, monopoly is the condition that describes the absence of competitive forces that are able to challenge a powerful business entity by producing similar goods or services or viable substitutes (Machovec, ...