Editing Imperfect competition (section)

== Range of imperfectly competitive market structures ==

There are '''FOUR''' broad market structures that result in '''imperfect competition'''. The table below provides an overview of the characteristics of each of these market structures.

{| class="wikitable"
|+ Characteristics of "imperfect" market structures
|-
! Market Structure !! Number of buyers and sellers !! Degree of product differentiation !! Degree of control over price  
|-
| Monopolistic Competition || Many buyers and sellers ||  Some || Some 
|-
| Oligopoly || Few sellers and many buyers || Some || Some 
|-
| Duopoly || Two sellers and many buyers || Complete || Complete
|-
| Monopoly || One seller and many buyers || Complete || Complete

|}

=== Monopolistic competition ===
{{Main|Monopolistic competition}}

A situation in which many firms with slightly different products compete. Moreover, firms compete by selling differentiated products that are highly substitutable, but are not perfect substitutes. Therefore, the level of market power under [[monopolistic competition]] is contingent on the degree of product differentiation. Monopolistic competition indicates that enterprises will participate in non-price competition.

Monopolistic competition is defined to describe two main characteristics of a market:

1. There are many sellers in the market. Each vendor assumes that a slight change in the price of his product will not affect the overall market price. The belief that competitors will not change their prices just because a vendor in the market changes the price of a product.

2. The sellers in the market all offer non-homogenous products. Companies have some control over the price of their products. Different types of consumers will buy the goods they like according to their subjective judgment.

There are two types of product differentiation:

* '''Vertical differentiation''': a product is unambiguously better or worse than a competing product (e.g. products that differ in efficiency or effectiveness); Customers select a product by using objective measures (e.g., price and quality) to rank their choices from best to worst.
* '''Horizontal differentiation''': a product that only some consumers prefer to competing products (e.g. Mercedes Benz and BMW). Customers make subjective choices about what they want to buy, because they have no objective criteria to distinguish the quality of products. Location and taste are important criteria to determine whether they are consumers' special preferences.  

Enterprises entering the monopolistic competition market may realize profit increase or loss in the short term, but will realize normal profit in the long run. If the price of the enterprise is high enough to offset the fixed cost above the marginal cost, it will attract the enterprise to enter the market to obtain more profits. Once the enterprise enters the market, it will occupy more market share by lowering the product price until economic profit reaches 0.<ref name=":0" />

Furthermore, each firm shares a small percentage of the total monopolistic market and hence, has limited control over the prevailing market price. Thus, each firms' demand curve (unlike [[perfect competition]]) is downward sloping, rather than flat. The main difference between monopoly competition and perfect competition lies in the paradox of excess capacity and price exceeding marginal cost.<ref>{{Cite book |last=Besanko |first=David |title=Economics of Strategy |publisher=Hoboken, NJ : John Wiley & Sons |year=2012 |isbn=9781118273630 |location=the United States  |pages=177–180 |edition=6th |language=English}}</ref>

=== Oligopoly ===
{{Main|Oligopoly}}

In an oligopoly market structure, the market is supplied by a small number of firms (more than 2). Moreover, there are so few firms that the actions of one firm can influence the actions of the other firms. Due to the small number of sellers in the market, any adjustment of product quantity and pricing by an enterprise will affect its competitors and thus affect the supply and pricing of the whole market. Oligopolies generally rely on non-price weapons, such as advertising or changes in product characteristics. Several large companies hold large market shares in industrial production, each facing a downward sloping demand, and the industry is often characterized by extensive non-price competition. The oligopoly considers price cuts to be a dangerous strategy. Businesses depend on each other. Under this market structure, the differentiation of products may or may not exist.<ref>{{cite web |title=3 Different Forms of Imperfect Competition |url=http://www.economicsdiscussion.net/imperfect-competition/forms/3-different-forms-of-imperfect-competition-market-situation/13773 |website=Economics discussion |date=16 November 2015 |publisher=Saqib Shaikh |access-date=1 April 2020}}</ref> The product they sell may or may not be differentiated and there are barriers to entry: natural, cost, market size or dissuasive strategies.

In an oligopoly, barriers to market entry and exit are high. The major barriers are:

* [[Patents]]; 
* Technology;
* [[Economies of scale]];
* Government regulation (e.g. limiting the issuance of licences); and 
* Firm name recognition.<ref name=kifle6>Kifle, T. (2020). Lecture 6: Competitors and Competition (Part II) [PowerPoint Slides] . Unpublished Manuscript, ECON2410, University of Queensland, St Lucia, Australia.</ref>

=== Duopoly ===
{{Main|Duopoly}}

A special type of Oligopoly, where two firms have exclusive power and control in a market. Both companies produce the same type of product and no other company produces the same or alternative product. The goods produced are circulated in only one market, and no other company intends to enter the market. The two companies have a lot of control over market prices.<ref name="Imperfect Competition">{{Cite web |title=Imperfect Competition |url=https://corporatefinanceinstitute.com/resources/knowledge/economics/imperfect-competition/ |access-date=2022-04-25 |website=Corporate Finance Institute |language=en-US}}</ref> It is a particular case of oligopoly, so it can be said that it is an intermediate situation between monopoly and perfect competition economy. Hence, it is the most basic form of [[oligopoly]].<ref name=kifle5/>

=== Monopoly ===
{{Main|Monopoly}}

In a monopoly market, there is only one supplier and many buyers; it is a firm with no competitors in its industry. If there is competition, it is mainly some marginal companies in the market, generally accounting for 30–40% of the market share. The decisions of marginal companies will not materially affect the profits of monopolists. The monopolist has market power, that is, it can influence the price of the good. Moreover, a monopoly is the sole provider of a good or service and thus, faces no competition in the output market. Hence, there are significant barriers to market entry, such as, patents, market size, control of some raw material. Examples of monopolies include public utilities (water, electricity) and [[Australia Post]]. 
<ref name="123a">Robert Pindyck and Daniel Rubinfeld. [2013]. ''Microeconomics''. United States: Pearson India: 8th ed., (2017) {{ISBN?}} {{page?|date=February 2025}}</ref> A monopolist faces a downward sloping demand curve. Thus, as the monopolist raises its price, it sells fewer units. This suggests that when prices rise, even monopolists can drive away customers and sell fewer products. The difference between monopoly and other models is that monopolists can price their products without considering the reactions of other firms' strategic decisions.

Hence, a monopolist's [[Profit maximization|profit maximising quantity]] is where marginal cost equals marginal revenue. At this point:

* '''Output''' is below the level of a [[perfectly competitive market]]; but 
* '''Price''' is above [[marginal cost]].<ref name=kifle6/>

A firm is a [[Monopsonist]] if it faces small levels, or no competition in '''ONE''' of its output markets. A [[natural monopoly]] occurs when it is cheaper for a single firm to provide all of the market's output.<ref>{{cite book |title=Economics of the Public Sector |date=2000 |publisher=Joseph E. Stiglitz |location=New York |isbn=0-393-96651-8 |page=78 |edition=3rd}}</ref>

Governments often restrict monopolies through high taxes or anti-monopoly laws as high profits obtained by monopolies may harm the interests of consumers. However, restricting the profits of monopolists may also harm the interests of consumers, because companies may create unsatisfied products that are not available in new markets. These products will bring positive benefits to consumers and create huge economic value for enterprises. Tax and antitrust laws can discourage companies from innovating.<ref>{{Cite book |last=Besanko |first=David |title=Economics of Strategy |publisher=Hoboken, NJ : John Wiley & Sons |year=2012 |isbn=978-1-118-27363-0 |location=the United States |pages=176–177 |edition=6th |language=English}}</ref>