There are several specific mechanisms of the business which can differentiate an economy. You might want to consider four main types of market structures, though, when you start with this topic just now: perfect competition, monopoly competition, oligopoly and monopoly.
Each company has its own set of features and assumptions, which in turn affect companies ‘ decision-making and their profitability.
It is important to note that in fact not all these competitive mechanisms exist; some of them are just hypothetical frameworks.
Nonetheless, they are important as they highlight the relevant aspects of the decision-making processes of competing companies. We will therefore help you to understand the economic principles behind it. Let’s dig at them more specifically with that.
1. Perfect Competition
Perfect competition represents a system of the economy in which many small businesses interact with one another. A single company has no significant market control in this situation. It results in a socially optimal level of production for the business as a whole, because neither organization could control market prices due to their structures.
The theory of perfect competition was based on several premises: (1) all businesses maximize profit; (2) unrestricted entry and exit to the market; (3) all companies sell exactly the same commodities (i.e., homogeneous goods). Looking at these conclusions, it is clear that in fact we will hardly ever see full rivalry. The only factor that can (theoretically) generate a socially optimal level of output will be because this is the only economic system.
The best example of the near-perfect competition market we can actually find is the stock market
2. Monopolistic Competition
Monopoly is often applies to a system of the economy in which many independent businesses compete against each other. In comparison to perfect competition, though, firms in the monopoly sector sell similar, yet somewhat distinct goods. Which gives them a certain amount of market power that allows them to pay a certain level of higher prices.
A monopolistic economy is based on the following hypothesis: (1) both businesses maximize profits (3) enter the market voluntarily and leave the market, (3) corporations offer distinct goods (4). Both theories are now a lot stronger than we have seen in perfect competition. The arrangement of the economy does no longer produce a socially optimal performance, since businesses have greater power and can have a definite effect on market prices.
The demand of cereals is an instance of unfair rivalry. Several popular brands are available (for example: Cap’n Crunch, Lucky Charms, Froot Loops, Apple Jacks). Some can taste very different, but they’re all breakfast cereals at the end of the day.
A business system regulated by only few small companies is characterized by an oligopoly. It adds to an uncompetitive environment. Organizations can either collaborate or function together. This will allow them to use their combined market power to raise rates and make further money.
( 1)both firms increase their income, (2) oligopolies can set prices, (3) obstacles to market entry or business exit, (4) commodities can be homogeneous and separated and (5) there are few firms that dominate the market. Thus, there are only a few businesses which have been in existence. Sadly, what exactly a “few businesses” entails is not clearly defined. As a rule we say that there are typically about 3-5 dominating companies in an oligopoly.
A monopoly relates to a framework of the industry in which a single company regulates the whole sector.
If we speak of monopolies, they are believed to be following: (1) monopolies increase profit; (2) competition can be developed, (3) strong entry and exit hurdles are present; (4) only one company is in charge of the whole industry.
From a social point of view, most monopolies are not necessarily attractive since their production and costs are smaller than competitive markets.
Therefore, the state also monitors them. Monsanto can serve as an example of a true monopoly. The firm labels nearly 80 per cent of all maize produced in the US, granting it high market position.
Four specific kinds of systems in the sector exist: ideal competition, weak competition, oligopolies and monopolies. Perfect competition defines market structures in which a large number of small competitors operate for identical goods.
In the meantime, unfair rivalry applies to a system of the industry, where a large number of small competitors operate for different products.
The oligopoly represents a system of the economy in which a limited number of firms participate. Finally, a monopoly is a business system in which a single company controls the entire sector.