Kudler Fine Foods
There are four main types of market structures; perfect competition, monopoly, monopolistic competition and oligopoly. “ A perfectly competitive market is a market in which economic forces operate unimpeded”(Colander, 2010). There are a six different criteria that must be met in order for a market to be considered a perfect competition.
Both buyers and sellers are price takers.
The number of firms is large.
There are no barriers to entry.
Firms products are identical.
There is complete information.
Selling firms are profit-maximizing entrepreneurial firms.
In order to understand what those requirements entail, a few terms need to ...view middle of the document...
The barriers can be legal, such as a patent, sociological barriers, natural barriers, or technological barriers where the market can really only support one firm. Three more important and common barriers to entry that exist for firms trying to enter into a monopolistic market are natural ability, economics of scale, and government restrictions. Natural ability is just that. It simply means that a firm is better at producing a particular good or service than any other firm. That particular firm is just more efficient because of unique abilities. “If sufficiently large economics of scale exist, it would be inefficient to have two companies producing that item since if each produced half of the output, neither could take advantage of the economic scale”(Colander, 2010). A good example of government restrictions, is with big pharmaceutical companies getting patents on certain drugs. Patents are given out on those drugs to promote companies to invest in the research to find cures for various diseases. The monopoly the patent gives those companies, gives them the opportunity to charge high prices for the drug to make up for the expenses research has cost them. If other firms were able to get into the market, it would bring competition, making those firms no longer in a monopoly market. Monopolies are not always guaranteed to make a profit, but they are able to price-discriminate. “When a monopolist price-discriminates, it charges individuals high up on the demand curve higher prices and those low on the demand curve lower prices”(Colander, 2010). This is how they are able to increase the profits that are coming into the firm. An example of this is with movie tickets. There are general admission prices, but discounted tickets to certain groups, such as, seniors and students.
Monopolistic competition is the next market structure to be discussed. The monopolistic competition structure is “a market structure in which there are many firms selling differentiated products and few barriers to entry”(Colander, 2010). Four main characteristics are;
Multiple dimensions of competition.
Easy entry of new firms in the long run.
When there are many sellers, firms do not take into consideration their competitors reactions to prices that are set. This is what gives a monopolistic competition its competitive characteristics. The goods are going to changes from firm to firm. They can be selling similar products, but with will not be homogenous in every firm. There are many forms of competition that is active in this market, not only price. “The firms attempt to compete of perceived attributes, advertising, service and distribution outlets”(Colander, 2010). There are no significant entry barriers to help promote the competition.
Lastly, the final market structure is oligopoly. Oligopoly is “a market structure in which there are only a few firms and firms explicitly take other firms’ likely response into account. In...