Characteristics of the four basic market models

Pure Competition

A market is said to be perfectly competitive if:

1. The products of all firms in the market are homogenous.
2. There are a great number of sellers and buyers of the commodity, so that the actions of an individual cannot affect the price of the commodity.
3. No barriers to entry and exit.
4. There is a perfect mobility of resources.
5. Consumers, resource owners and firms in the market have perfect knowledge of present and future prices and costs.

Perfect competition model is a theoretical implementation, but it can help to study markets close to it, evaluate monopolization degree and work on economic equilibrium of a firm.

Pure Monopoly

Absolute or p ure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes.

Characteristics of monopoly:

• Single seller
• No substitutes
• Considerable market power
• High entry barriers

There are several types of monopolies:

• Natural
• Raw materials
• Local

Considerable market power allows monopolies to conduct special price policy called price discrimination.

Price discrimination:

• First level
• Second level
• Third level

Oligopoly

Number of firms: Few (2-6)

Type of product: Undifferentiated or differentiated

Entry Condition: Difficult

Oligopoly usually bears non-price competition as price behavior is constrained with interdependence (prisoners’ dilemma).

According to prisoners’ dilemma both criminals will recognize their crime, because of high risk and absence of assurance in the actions of other criminal. Such absence of assurance is the key point why companies in oligopoly cannot have rice competition:

If one company drastically increases the price it will loose all customers. There is no assurance that another company will also increase the price as it is easier for it to do nothing and wait as the customers flow from company with increased prices. The price increase should be simultaneous by both companies. This should bear a kind of price agreement between companies.Price agreement does not take place because:

• Forbidden by law
• No full trust

Characteristics of the four basic market models

Weak market concentration High market concentration

1. Questions:
1. Describe concept and functions of competition.
2. How to determine market structure?
3. Name characteristics of pure competition.
4. Name characteristics of pure monopoly.
5. Describe types of monopolies.
6. Explain the concept of price discrimination.
7. Name characteristics of oligopoly.
8. Explain price behavior in oligopoly.
9. Give full comparison of four types of market structures.
2. Glossary.

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