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Essay On Economic Market Structures
It is well-documented fact that the profit gained by firms and market prices are related to the market structure. In common understanding, great concentration of the market causes higher
prices and the higher firms’ profit.
A pure competition case relates to a situation of a large number of firms competing on the finite market, in the course of market development the possibilities of making positive profit disappear and at the equilibrium state the profit of competitive firms is equal to zero, the only profit made by firms is the ‘normal’ profit embedded into the supply function in the form of the opportunity costs.
Monopolistic competition satisfies the following conditions:
- Like perfect competition in that there is a large number of sellers so that the actions of one producer have no significant effect on rivals.
- Like monopoly and oligopoly in that each seller faces a negatively sloped demand curve for a 'distinctive' product.
- Each seller possesses some market power depending on the elasticity of demand.
“Under monopolistic competition, independence of producers results from the 'attachment' of certain consumers to specific producers. This affects price but to a lesser extent than under monopoly.”(Kwasnicka 1992)
In the long-run, price equals average costs but marginal revenue equals marginal cost. In theory monopolistic competition is considered inefficient because price is higher and quantity supplied lower than under perfect competition.
Monopolistic competition occurs in a market in which product differentiation exists and which exhibits elements of both perfect competition and monopoly. There are a large number of sellers of close substitutes that are not exactly the same. Under these conditions it is difficult to determine exactly what the industry is.
Given that each firm's product is slightly different it faces a negatively sloped demand curve. The position of the demand curve depends, however, on the price of other firm's output.....
