An American social entrepreneur, David Green, recently stated the following: “Let’s face it. The market economy is based on a fundamental deception: I (a company) know how much it costs to make something, and I’m going to fool you, the consumer, into paying as much as possible. I find this assertion false and misguided. While some markets are more desirable than others, no one is being fooled into paying as much as possible.
In the following essay I will evaluate each of the four market types (monopoly, oligopoly, perfectly competition, and monopolistic competition) and discuss why I believe Mr.. Green’s statement is incorrect. Markets are the heart and soul of a capitalist economy, and different degrees of competition lead to different market structures, with differing implications for the outcomes of the market place. Each of the above mentioned market structures describes a particular organization of a market in which certain key characteristics differ.
The characteristics are: (a) number of firms in the market, (b) control over the price of the product, (c) type of product sold in the market, (d) barriers to new firms entering the market, and (e) existence of neoprene competition in the market. A perfectly competitive market is an idealized version of market structure. Three conditions are necessary before a market is considered perfectly competitive. These are: homogeneous products, existence of many sellers and buyers, and perfect factors of production. Society finds these markets desirable for two reasons.
The first reason is that the price charged to individuals equals the marginal cost of production to each firm. In other words, one could say sellers charge buyers a reasonable or fair price. Second, in general output produced under a perfectly competitive market structure is larger than other markets organizations. Thus, perfect competition becomes desirable also for the amount of the product supplied to consumers as a whole. To maintain a reasonable amount of competition in a market is generally considered a goal of government regulatory policies. No single firm dominates the market under perfect competition.
However, no industry in the world really satisfies all three conditions mentioned above fully so, perfectly competitive markets don’t really exist, but are taught to help explain the real world. As pointed out above, industries in the real world rarely, if ever, satisfy conditions necessary to qualify as perfectly competitive market structures. Many industries that we often deal with have market structures that are monopolistic competition or oligopoly. Apparel retail stores (with many stores and differentiated products) provide an example of monopolistic competition.
As in the case of perfect competition, monopolistic competition is characterized by the existence of many sellers, and about the quantity of the product produced on the basis of the profit minimization principle- it produces the quantity that maximizes the firm’s profit. Also, conditions of profit minimization remain the same- the firm stops production where marginal revenue equals marginal cost. But unlike perfect competition, a firm under monopolistic competition has some control over the price it charges, as the firm Economics By Tanana small because there are a large number of other firms in the industry with similar products.
So if a business decides to raise its prices a consumer can Just go somewhere else. No one is being fooled here. Oligopoly is a very common market structure in the United States. Both the steel and auto industries are good examples of oligopolies. In an oligopoly there are a small number of firms in the market because the barriers to entry are quite large. Unlike monopolistic competition, if an oligopolies firm changes its price or output, it has perceptible effects on the sales and profits of its competitors in the industry.
Thus, an oligopolies firm always considers the reactions of its rivals when choosing its pricing or output decisions. For example, if an oligopolies firm cuts its price, it is met with price reductions by competing firms; however, if it raises the price of its product, rivals do not match the price increase. For this reason, prices remain stable in an oligopolies industry for a long period of time. Oligopolies markets provide a fair agree of competition in the market place, so prices stay fair, most of the time. Again no one is being fooled here.
A monopoly can be considered the opposite of perfect competition. It is a market in which there is only one seller, and huge barriers to entry. Monopolies are not rare and several industries in the United States have monopolies, utility companies are a good example. Generally speaking, price and output decisions of a monopolist are similar to those of a unapologetically competitive firm, with the major difference being a large number of firms under monopolistic competition and only one firm under monopoly. Thus, one may say that there is no competition under monopoly.
This is not entirely true, as even a monopolist is threatened by indirect and potential competition. Like monopolistic competition, a monopolistic firm also maximizes its profits by producing up to the point where marginal revenue equals marginal cost. However, since monopolies can produce less output and charge higher prices than under perfect competition and under monopolistic competition, monopolies are usually not very desirable market conditions. But if a monopoly is regulated, which they are, then a monopoly can be considered desirable and again no one is being lolled into paying too much for something.
To sum up, industries in the real world are rarely characterized by perfect competition. In certain circumstances, society has to tolerate a monopoly (a natural monopoly or a monopoly due to patent rights). However, the idea of competition is very deeply ingrained in our society and promotes low and fair prices for everyone. So long as there is a reasonable degree of competition, as with the case of monopolistic competition or oligopoly, society should feel secure about its markets and not like they are being fooled in anyway.