Market structure at the moment it is a complex system in which such concepts as perfect competition, monopolistic competition, oligopoly, monopoly are manipulated. The last two are opposite, representing extreme cases. And more realistic models at the moment are monopoly, oligopoly, monopolistic competition. Each of these phenomena should be considered separately.
Monopoly
In this case, the numerical distribution of participants on the supply and demand side is such that there are many buyers per seller. The concept of the industry and one company completely coincides. For new companies, access to the market is completely blocked. The seller sets a fixed price for his goods and services. There is almost no competition, due to which advertising is practically not used. In this case, monopoly and oligopoly have very little in common. The remaining differences should be considered.
Oligopoly
The characteristic features of this market structure are as follows. The participants on the supply and demand side in this case are distributed in a very specific way: we are talking about several sellers and many buyers. Firms are given significant market shares. Market access for new organizations is noticeably difficult. Sellers are mutually dependent on each other, therefore, prices are set in accordance with certain rules. The competition in this case is quite strong, which affects the high quality and quantity of advertising. And this is the noticeable difference that characterizes oligopoly and monopoly.
Monopolistic competition
This market model differs from the rest in all respects. Market participants in such a situation are distributed as follows: many sellers offer their goods or services to many consumers, that is, small firms are assigned small market shares. For new companies, access to the market is completely open, but existing consumer preferences may become an obstacle to the introduction of something new. Vendors are focused on the individuality of products, which allows them to make wide maneuvers with prices. If we talk about competition, then it is the strongest, due to which advertising is presented in large volumes, but sellers compete at prices, providing more attractive conditions for consumers.
It can be seen that monopoly and oligopoly are not so different structures, because the latter tends to degenerate into the former. And monopolistic competition is directed towards becoming perfect competition. Now you can consider in more detail such concepts as competition, pure competition, monopoly, oligopoly. It is worth starting with extreme manifestations.
The essence of oligopoly
An oligopoly means a market structure in which the demand of most buyers in the industry is satisfied by a small number of manufacturers. There is a concept that is completely opposite to oligopoly - oligopsony. It means that a small number of buyers deal with a large number of manufacturers and sellers.
Oligopoly efficiency
If we talk about whether oligopoly is an effective market structure, then there are two points of view on this topic that speak of its economic consequences.
The traditional view suggests that its actions are similar to a monopoly, which leads to results similar to a pure monopoly.Moreover, in an oligopoly, there is an external appearance of competition between a number of independent firms. Schumpeter-Galbraith's point of view suggests that oligopoly is the engine of scientific and technological progress, which results in improved products with lower prices and a high level of production and employment than in a situation where the nature of the organization of the industry is different.
Character traits
Characteristic features of the oligopoly include the following options:
- A small number of firms are represented in the industry. Most often with this market structure there are from two to ten large organizations that carry out more than half of all sales of a particular product.
- Products on the market may be differentiated or standardized. If we talk about the latter, then lead, aluminum markets can be such examples. Oligopolistic markets with goods from the first category are markets for cigarettes, beer, cars, chewing gums and more.
- If oligopoly and monopoly are considered, then it is worth noting that for new firms, entry into the market is either significantly difficult or impossible. Most often, there is a certain barrier to entering the market, which is similar to that which corresponds to entering the market of a pure monopoly: all key types of raw materials are under control, each representative has patents, there is economies of scale and other equally important points.
- Oligopolistic firms are highly dependent on each other, so their market behavior is built in accordance with a specific strategy. Under the strategic behavior of the company we can understand that when changing their prices, quantity or quality of goods, actions are necessarily calculated so as to take into account all the response actions of competitors. Since there can be many answers, one cannot speak of the existence of a unified theory of oligopoly. If we analyze such phenomena as monopoly and oligopoly, then it will not be superfluous to apply game theory.
Market concentration
There is a Herfindahl index designed to measure market concentration. It is calculated as follows: H = S1 + S2 + S3 + .... Sn, where S1 represents the market share of the company, which provides the maximum volume of supply of products; S2 represents the next largest supplier and so on. Changes in the index can range from 100 to 10,000. In the first case, it is a pure monopoly. In the United States, a market with a Herfindahl index of 1000 or lower is generally called relatively non-concentrated. If H = 1800 or more, then we can talk about a high market concentration.
How does the company behave?
For a company operating in an oligopoly, there is a certain strategy of behavior:
- Non-cooperative interaction. Despite the fact that firms compete with each other, their market behavior policy is independent. There are several models in which the main options for a non-cooperative strategy are reflected: the Cournot, Forheimer, Bertrand and Stackelberg model. The Cournot model is considered to be classical for a duopoly, that is, a market structure in which two sellers are the only producers of a standardized product that does not have close substitutes or analogues.
- Cooperative behavior. This option is characterized by the fact that firms agree in advance on joint actions in the market. If monopoly and oligopoly are considered, then it is worth noting that cooperative behavior is most often expressed in the presence of collusion. This implies an agreement between firms on a type of activity that will exclude rivalry that causes mutual harm. If there is a formal agreement between firms on prices and volumes of production, or on the division of markets, then we are talking about a cartel.These may be explicit agreements, provided that they are not prohibited by law, as well as secret ones. The most famous international cartel at the moment is the Organization of Middle Eastern Oil Exporting Countries - OPEC. Most often, cartels are unstable.
Additional mechanisms
Price leadership is another mechanism for covert coordination of sellers' price behavior. He is characterized by a situation where a company that dominates the oligopoly is a price leader. It is the leader who sets the monopoly price, which is based on his marginal cost and marginal revenue. The price rises or falls by this leader company, and all other market participants either support this movement or are left without customers. In this case, competition, oligopoly and monopoly merge into a single concept. In terms of price leadership, unlike the cartel, the freedom of firms is fully preserved.
Oligopolistic behavior patterns
Oligopolistic firms behave in accordance with different models:
- because of the broken demand curve, we can talk about price hardness even in the face of increased costs;
- in terms of pricing, due to which entry into the industry is limited, we can say that the company will abandon current profits, while maintaining low prices in order to prevent new sellers from entering the market.
The oligopoly (monopoly) market assumes that all imperfect competitors will maximize profits for a certain volume of production.
Monopolistic Competition: Description
Monopolistic competition should be understood as such a market structure, which is characterized by the offer of differentiated products from many firms. For this type of market structure, the following features are characteristic:
- The products of each firm serve as an imperfect substitute for the products of other firms. Each company produces goods that customers see as different from the products of other organizations. The differentiation of goods may be due to either actual qualitative differences between them, or assumed, for example, differences in advertising, trademarks, territorial location and other parameters. The differentiation of goods in practice is measured by the number of brands, the volume of firms spending on advertising, according to customer surveys talking about adherence to a particular product and so on. Pure monopoly (oligopoly) receives a certain power over the market due to product differentiation.
- In the case of monopolistic competition, we are talking about a relatively large number of sellers with a small share, but also not so small that they are characteristic of the market of perfect competition. Monopolistic competition is characterized by such sizes of market shares of firms that, in general, exceed 1%. A typical case is characterized by the fact that each company receives 1-10% of all sales on the market during the year. Demand for products of individual firms may be strong, but not perfectly elastic. Demand elasticity is directly dependent on the number of competitors and the strength of differentiation, while the market is rapidly approaching pure competition.
- The market provides free entry. In the case of such a structure, the founding of a new company is a simple task, and leaving the market is even easier.
- When choosing a price, companies do not take into account the reaction of competitors. Since there are many firms on the market, in the face of lower prices by individual monopolistic competitors, its sales volumes will grow due to many sellers, and not due to one or more. At the same time, in such a market, price competition is relegated to the background, and non-price competition is paramount. The extreme manifestations of all these points can be monopoly, oligopoly, monopsony.
Prospects
As a result of all the maneuvers in the market, a monopolistic competitor can count on obtaining economic profit in the short term. Firms will continue to enter the market until profit opportunities run out at all. If we talk about long-term equilibrium, then no company that is a monopolistic competitor will not receive a profit greater than normal. Oligopoly, monopoly, perfect competition - these are concepts that are characteristic in general terms for the market of any country.
