Different Types of Market Systems
Depending on the ratio between the number of manufacturers and the number of consumers distinguish the following types of competitive structures:
- A large number of independent producers of some homogeneous product and the mass of isolated consumers of the product. This market structure is called polypoly and creates so-called perfect competition.
- A large number of disconnected consumers and a small number of producers, each of which can meet a significant proportion of total demand. This structure is called oligopoly, and it creates the so-called imperfect competition
- Single consumer of goods and many independent manufacturers This structure creates a special type of imperfect competition, called monopsony (demand monopoly).
- The relationship structure, where the sole consumer is opposed by a single producer (two-way monopoly), is not competitive at all, but also not market-oriented.
Let’s take a closer look at the main models listed above.
A large number of sellers and buyers of the same product. Changes in the price of some seller cause a response only among buyers, but not among other sellers.
The market is open to everyone. Advertising companies are not so important and obligatory as only homogeneous products are offered for sale, the market is transparent and there are no advantages. In a market with a similar structure, price is a given size. Based on the above, we can derive the following behaviors of market participants:
Price acceptor. A single seller does not have any direct effect on price. If a seller asks for a higher price, all buyers immediately go to his competitors, because in conditions of perfect competition, each seller and buyer have complete and correct information about the price, product quantity, costs and market demand.
If the seller asks for a lower price, then he will not be able to meet all the demand that will be focused on him, because of his small share of the market, with no direct impact on the price from this particular seller.
Quantity regulator. If the seller is forced to accept the prevailing market prices, then the seller can adapt to the market by regulating his sales volume. In this case, it determines the number of goods it intends to sell at a given price. The buyer also has only to choose how much he wants to receive at this price.
The conditions of perfect competition are determined by the following prerequisites:
- a large number of sellers and buyers, none of which has a significant impact on the market price and quantity of goods;
- each seller makes a homogeneous product that is in no way different from the product of other sellers;
- barriers to entry in the long term are either minimal or none;
- no artificial constraints on demand, supply or price exist and resources – variable factors of production – mobile;
- every seller and buyer has complete and correct information on price, quantity of product, costs and demand in the market.
The scheme of perfect competition is basically theoretical. However, it is the key to understanding more real market structures.
For market participants in conditions of perfect competition, the price is the set size. Therefore, the seller can only decide what amount of goods he wants to offer at this price. This means that it is both a price acceptor and a quantity regulator.
One seller confronts many buyers, and this seller is the only manufacturer of a product that does not have, in addition, close substitutes. Such a model has such features as:
- the seller is the only manufacturer of this product (product)
- the product sold is unique because there are no substitutes;
- the monopolist has market power, controls prices, supplies to the market (the monopolist is the price legislator, ie the monopolist sets the price and the buyer can decide at the given monopoly price what quantity of goods he can buy);
Therefore, a monopoly is the exclusive right of production, trade, fishing, etc. belonging to one person, to a certain group of persons or to the state; a market where one seller of a certain product or type of service operates. There is a closed, natural and open monopoly.
Such a classification of a monopoly into three categories is conditional.
Some firms may belong to several types of monopoly. These include, for example, telephone service firms, as well as electricity and gas companies, which can be attributed to both natural monopoly (because there is an economies of scale) and closed monopoly (therefore that there are barriers to competition).
Classification based on time intervals may also be conducted. For example, a patent certificate gives a firm a closed monopoly for the short term. The latter is due not only to the limited duration of the patent, but also to the fact that competitors can invent new products.
Monopoly is the complete antithesis of perfect competition. There is only one seller here, and he produces goods that have no close substitutes.
A natural monopoly arises in an industry in which long-term average costs reach a minimum only when one firm serves the market as a whole. In such an industry, the minimum effective scale of production is close to sufficient to cover production costs. In this situation, the division of production between two or more firms will cause the production scale of each to be ineffectively small. Natural monopolies, on the basis of which economies of scale are based, are closely linked to monopolies based on the possession of unique natural resources.
Natural monopolists include public utilities and enterprises operating unique natural resources (eg, electricity and gas, water utilities, communication lines, and transportation firms). As a rule, such “natural monopolies” are owned or controlled by the state.
Open Monopoly is a monopoly in which one firm becomes, at least for a time, the sole supplier of the product but has no special protection against competition. In an open monopoly situation, firms that first enter the market with new products are often found. However, their competitors may hit the market a little later.
A closed monopoly is protected from competition by legal restrictions. An example is the US Postal Service’s monopoly on first class mail delivery. Other options for the emergence of a closed monopoly are patent protection, the copyright institute. Artificial barriers to prevent competitors from entering the monopolistic market are subject to legal restrictions in the form of licenses, copyrights, trademarks or patent protection.
Monopoly pure (absolute) – a situation where only one seller acts in a specific commodity market.
Monopoly in its purest form is extremely rare. Like perfect competition, it is rather an economic abstraction. Quite often, an example of a pure monopoly is the telephone system. But other types of communication (such as express mail or satellite communication) create hidden competition by offering quality phone substitutes. In addition, it should be noted that a monopoly cannot completely eliminate potential competition from other domestic or foreign producers of goods.
The monopoly that arises from demand, when there is only one buyer in the market with many sellers, is called monopsony. Such a market structure is similar to a monopoly, the features of which are transferred to the buyer.
Monopolistic competition is when a large number of manufacturers offer similar but not identical products.
Unlike perfect competition, the monopoly assumes that each firm sells a special type of product, which is distinguished by quality, design, prestige, so that consumers have “non-price advantages” (political, aesthetic, physiological). In a monopolistic competition, the company produces not different but differentiated products and thus becomes a kind of “monopolist” of its brand of goods (for example, Snickers chocolate has different taste properties than regular milk chocolate, and Colgate toothpaste differs from “Fluorodent” and odor, composition and reputation).
In the market of monopolistic competition, products can also be differentiated by the conditions of after-sales services (for durable goods), by proximity to buyers, by the intensity of advertising. Thus, firms in this market enter into a kind of rivalry not so much through prices, but through any differentiation of products.
The market model for monopolistic competition describes many real-world markets. Most characteristics of the service sector correspond to its characteristics (for example, we can name a chain of restaurants, service stations, banking services, in the manufacturing industries – the production of clothing, soft drinks, laundry detergent, computers, computers).
The monopoly in such a model is that each firm, in terms of product differentiation, has to some extent monopoly power over its goods; it can raise and lower its price regardless of the actions of competitors, although this power is limited by the availability of manufacturers of similar products. In addition, there are large enough monopoly markets alongside small and medium-sized firms.
With this model of the market, firms are trying to expand their area of preferences by individualizing their products. This is done primarily through trademarks, names and advertising campaigns that uniquely distinguish product differences.
Oligopoly is the dominant form of the modern market structure. The term “oligopoly” is used in the economy to describe a market in which there are several firms, some of which control a large part of the market and entry into this market of new firms is difficult. Examples of classic oligopolies: “Big Three” in the US – “General Motors”, “Ford”, “Chrysler”.
Products manufactured by firms can be both homogeneous and differentiated. Homogeneity prevails in the markets of raw materials and semi-finished products: ore, oil, steel, cement; differentiation – in the markets of consumer goods (cars).
Few firms favor their monopolistic agreements: price fixing, market sharing or other means of restricting competition between them. It has been proved that competition in the oligopolistic market is more intense, the lower the level of concentration of production (more firms), and vice versa.
The existence of oligopoly is associated with restrictions on entry into the market. One of them is the need for large investments to create an enterprise in connection with large-scale production of oligopoly firms.
The small number of firms in the oligopolistic market forces these firms to use not only price but also non-price competition, since the latter is more efficient in such conditions. Manufacturers know that if they lower prices, their competitors will do the same, which will lead to a drop in profits.
The price war is a recurring and long-term decline in the prices of oligopoly firms, with the help of which firms expect to increase sales and profits. But it rarely benefits them.
Therefore, instead of price competition, which will be effective in conditions of perfect competition, “oligopolists” use non-price methods of struggle: technical advantage, quality and reliability of the product, methods of sale, nature of services and guarantees provided, differentiation of payment conditions, advertising, economic espionage.