Market Structures: Competitive Dynamics and Strategies

In a perfectly competitive market-- a market in which there is many buyers and sellers, none of whom represents a large part of the market-- companies are rate takers. That is, they are sellers of products who believe they can sell as much as they like at the current price however can not influence the rate they receive for their item. For instance, a wheat farmer can offer as much wheat as she likes without worrying that if she attempts to offer more wheat, she will depress the marketplace cost.

The factor she need not fret about the result of her sales on prices is that any individual wheat grower represents only a small portion of the world market. When only a few companies produce a good, however, the situation is various.

To take possibly the most significant example, the aircraft production huge Boeing shares the marketplace for large jet aircraft with only one significant rival, the European company Jet. As a result, Boeing understands that if it produces more aircraft, it will have a substantial impact on the total supply of aircrafts on the planet and will for that reason considerably drive down the rate of airplanes.

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Or to put it another method, Boeing knows that if it wants to sell more airplanes, it can do so only by considerably minimizing its price. In imperfect competition, then, firms are aware that they can influence the rates of their items and that they can offer more only by lowering their price.

This situation happens in one of 2 methods: when there are just a couple of major producers of a particular excellent, or when each firm produces an excellent that is distinguished from that of competing firms.

Monopoly profits rarely go uncontested. A firm making high revenues usually draws in rivals. Thus situations of pure monopoly are unusual in practice. Rather, the usual market structure in industries identified by internal economies of scale is one of oligopoly, in which numerous companies are each large adequate to affect prices, however none has an uncontested monopoly. The general analysis of oligopoly is a complex and questionable topic since in oligopolies, the rates policies of companies are synergistic. Each firm in an oligopoly will, in setting its rate, think about not only the actions of consumers but likewise the anticipated actions of competitors.

In monopolistic competition models, two key assumptions are made to get around the problem of interdependence. First, each firm is assumed to be able to differentiate its product from that of its rivals. That is, because a firm’s customers want to buy that particular firm’s product, they will not rush to buy other firms’ products because of a slight price difference. Product differentiation thus ensures that each firm has a monopoly in its particular product within an industry and is therefore somewhat insulated from competition.

Second, each firm is assumed to take the prices charged by its rivals as given—that is, it ignores the impact of its own price on the prices of other firms. As a result, the monopolistic competition model assumes that even though each firm is in reality facing competition from other firms, each firm behaves as if it were a monopolist—hence the model’s name.

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