Have you ever wondered why you can buy some products from 1000s of brands, like t-shirts, while for others there is one sole supplier that comes to mind, like the electricity in your house? Well, this is all due to market structures! In economics there are 4 key market structures: perfect competition, monopolistic competition, oligopoly and monopoly. They all have advantages and disadvantages, and occur in different situations, depending on how firms can earn profit the easiest.
Firstly, perfect competition is the market structure with the most firms, where all the products are identical and there are low barriers to entry, meaning that a firm can easily become a part of the market since production costs are low, and there is no need for substantial investment. An example of this would be sellers of fruits and vegetables, since they all sell the same thing worldwide. The one disadvantage of this market structure is that firms do not have control over the prices that they can charge, since if they raise their prices, due to there being a multitude of substitutes, the consumers will just switch to their competition. I mean why buy something if it’s more expensive than the same thing somewhere else?
Not unlike perfect competition, monopolistic competition also has a multitude of firms, but there are slight differences in the products that they offer. There are also low barriers to entry, but these firms rely heavily on branding, advertising and social media to sell their products, since people have to justify spending extra money on a product that is almost the same as its substitutes. Examples of monopolistic competition would be coffee shops, or athleisure brands. The disadvantages of this market structure are the fact that they also don’t have control over their prices, and due to this, are unable to make profit in the long-run in most cases, since they heavily rely on trends and high consumption.
In an oligopoly, a few firms have a substantial share of the market. For example, if you think of gas stations in Romania, very few brands come to mind. This is because it takes a lot more money to start out in the industries where they are oligopolies, and there is no guarantee of a return on investment. Since oligopolies have large-scale firms, they also benefit from economies of scale, meaning that their costs are lower since they produce a lot, so they can price lower. This way, firms that would enter the market would not be able to price as low, and therefore not have sales or profits. Their products can be identical or differentiated, and they have some market power when pricing, but they usually collude, or keep their prices similar to maximise profits for everyone. Therefore firms in an oligopoly are interdependent.
Monopolies have one firm that takes up the majority of market share in a market, and are the sole providers of a product, like Google for example. They have a unique product, that has no close substitutes, and because of that they can fully control the price it is sold for, as consumers have no choice but to buy the product from them regardless. It is also nearly impossible for firms to enter the market, since monopolies price high enough to make large profits, but low enough to drive out any starting firms due to extremely high starting costs, since barriers to entry are high. This way monopolies can earn high profits in the long-run as well.
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