1. PERFECT COMPETITION
This is also known as pure competition) describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly
Characteristics of a perfect competition market
Generally, a perfectly competitive market exists when every participant is a “price taker”, and no participant influences the price of the product it buys or sells. Specific characteristics may include:
- A large number buyers and sellers
A large number of consumers with the willingness and ability to buy the product at a certain price, and a large number of producers with the willingness and ability to supply the product at a certain price
- No barriers of entry and exit
The no entry and exit barrier makes it extremely to enter or exit a perfectly competitive market
- Perfect factor mobility
In the long run factors of production are perfectly mobile, allowing free long term adjustments to changing market conditions.
- Perfect information
All consumers and producers are assumed to have perfect knowledge of price, utility, quality and production methods of products.
- Zero transaction costs
Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
- Profit maximization
Firms are assumed to sell where marginal costs meet marginal revenue, where the most profit is generated.
- Homogeneous products
The products are perfect substitutes for each other; i.e.-the qualities and characteristics of a market good or service do not vary between different suppliers.
- Non-increasing returns to scale
The lack of increasing returns to scale (or economies of scale) ensures that there will always be a sufficient number of firms in the industry.
- Property rights
Well defined property rights determine what may be sold, as well as what rights are conferred on the buyer.
- Rational buyers
Buyers are capable of making rational purchases based on information given.
- No externalities
Costs or benefits of an activity do not affect third parties
2. IMPERFECT COMPETITION
Imperfect competition is a competitive market situation where there are many sellers, but they are selling heterogeneous (dissimilar) goods as opposed to the perfect competitive market scenario. As the name suggests, competitive markets that are imperfect in nature.
Description: Imperfect competition is the real world competition. Today some of the industries and sellers follow it to earn surplus profits. In this market scenario, the seller enjoys the luxury of influencing the price in order to earn more profits. If a seller is selling a non identical good in the market, then he can raise the prices and earn profits. High profits attract other sellers to enter the market and sellers, who are incurring losses, can very easily exit the market.
Forms of imperfect competition include:
Oligopoly-in this market, there are few sellers of a product/good. Characteristics
1.Contains few firms who produce goods that are substitute but need to be perfect substitutes.
2.Lies somewhere between extreme of perfect competition are monopoly.
3.There are barriers to the entry.
4.Decision of the firms are strictly interdependent
5.Sellers agrees on the price or the market share
Forms of oligopoly
- Duopoly where market is dominated by two firms
- Pure oligopoly where the products of the few sellers are identical.
- Differentiated oligopoly where products are differentiated in term of quality packaging etc.
- Collusive oligopoly where the few sellers in the market come together and make decisions to control the prices, quality and quantity to be produced.
- Non collusive oligopoly where the few sellers determine their prices, quality and quantity without colluding.
Monopolistic competition-In this market, there are many sellers producing highly differentiated products. Examples include: restaurants, hair dressers etc
1 There are many buyers and sellers in the market
2 The product of the sellers is differential yet very close substitute for each other
3 There is freedom of entry and exist of firms
4 The goal of the firms is profit maximization both in the short run and in the long run.
5 The prices of factors of production and technology are given. Under this competition, each producer sells a product which is to slightly different from that of the competitor and attempts to emphasize on differences like packaging and advertisements.
Monopsony-This is where there are many sellers but only one buyer.
Oligopsony This is where there are many sellers but few buyers.