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March 06, 2018

Types of Markets - Perfect & Imperfect Competition

March 06, 2018


In common language, the term market is referred to the place where goods are bought and sold. But in economics, it has different meaning. In economics, market is the arrangement or situation in which buyers and sellers contact with another to carry on business transactions. There is no need of fixed location, face to face contact between buyer and seller. They only need to communicate each other for trading, which may be through letters, mobile phone, internet or any other medium.




Types of Markets

The types of markets are following. Each type is explained in detail.

1. Perfect market. (Perfect competition)
2. Imperfect market. (Imperfect competition)

Market Structure: Economics

1. Perfect Market (Perfect Competition)

In perfect market, goods are bought and sold under perfect competition. Following are the characteristics or conditions of perfect market or competition.

  • Large number of buyers and sellers: There is a large number of buyers and sellers exist in the perfect market. Therefore, neither sellers nor buyers can influence the market price. Consequently, the market price remains unchanged. If the price of a good increases by a single seller, the buyer will immediately move to another seller. 
  • Homogeneous products are being traded: Under perfect market or competition all the firms produce identical goods having same quality and features. The products are perfectly substituted. A buyer can buy a product from any seller in the market.
  • Free entry and exit of firms: There is no legal, social or market restrictions on entry and exit of the firm. Any firm can enter and leave the industry. 
  • Perfect awareness of market conditions: All the buyers and sellers know the prevailing price of the good and its availability in the market.  So, by having perfect awareness of the market conditions, no one can sell or buy the product at a higher rate.
  • Factors of production are perfectly mobile: All factors of production (land, labor, capital and organization) are freely mobile. Land can be bought or rented. Labor and capital can be moved from one firm to another. In the same way, any organization can enter or leave the industry.
  • Free from government interference: There is no government interference in the market. A seller can sell his product to any buyer in any quantity.           

2. Imperfect Market (Imperfect Competition)

In imperfect market, goods are bought and sold under imperfect competition. Following are the kinds of imperfect market:

a. Monopoly
b. Oligopoly
c. Duopoly
d. Monopolistic competition

a. Monopoly

Under monopoly there is only one seller or producer exists in the market and he has full control over the price of a good. Monopoly has the following features.

  • Single seller: In monopolist market there is a single seller or a producer or a group of producers offering a particular product. Under monopoly, the firm itself is an industry.
  • No perfect substitute: The product monopolist sells has no close or perfect substitute available in the market.
  • No entry of new firm: There are many barriers (e.g. Legal, technical, economic, high initial investment etc.) on entry of the new firm to the monopolist market.
  • Price setter:  The entire control of supply is in the hands of monopolist firm. This advantage enables the monopolist firm to set its own price of the product.

b. Oligopoly

In oligopolistic market, there are few numbers of sellers or producers exist in the market who dominate the entire industry. The product they offer may be homogeneous or differentiated. Following are some of the features of oligopoly.

  • Monopoly power:  The element of monopoly also exists in oligopoly. Since there are only a few firms and each firm possess a large share of the market. This large share enables the firms in oligopolistic market to control the price and output. 
  • Price Rigidity: Price rigidity refers to a situation in which price is kept fixed. It is so because if a firm reduces the price in the oligopolistic market, the other firms in response will cut down their prices at a higher level. As a result, a price war occurs among them which benefits no one. Therefore, the price rigidity takes place.
  • Firms are inter-dependent: Since there are only a few firms and each firm enjoys a large share of the market and has control over the price and output. Thus, the firms are inter-dependent because each firm knows that the other firms will react to its change in price and output decisions, because each firm treats the other firm as rival by producing identical or slightly differentiated product. 
  • Conflicting attitude of firms: When firms realize the disadvantages of mutual competition and they want to maximize their profits. This situation leads to the formation of collusion among them. This collusion leads to conflicts which arise by allocation of markets and distribution of profits.

c. Duopoly

Duopoly is a kind of imperfect market where two sellers exist in the market providing a particular product or service. A firm cannot take independent decisions about price and output as it has to consider the view point of other firm (competitor). Duopoly has all the characteristics of oligopoly except the number of sellers which are only two in case of duopoly.

 d. Monopolistic Competition

Monopolistic competition is a form of imperfect competition where large number of producers exist in the market selling products that are differentiated by brand or quality, hence they are not perfect substitutes. Following are the characteristics or features of monopolistic competition.

  • Large number of firms: There are large number of firms selling differentiated products. Each firm possesses limited share of the market due to large number of sellers, which lead to stiff competition.  
  • Product differentiation: It is one of the most important characteristics of monopolistic competition. In perfect competition, identical products are being traded. But in monopolistic competition, each firm produces differentiated products in order to maintain its separate entity.  The product is differentiated by brand, design, color, size, shape, packing, quality etc.
  • Free entry and exit of firms: Any firm can enter and leave the industry at any time. This feature of freedom of entry and exit of firms increases competition in the market. This feature also ensures normal profit in the market for a long run.
  • Selling Costs: Selling costs are the expenses which are incurred on marketing, sales promotion and advertisement of the product. Under monopolistic competition each firm tries to attract customers and capture the market by incurring selling costs.
  • Absence of interdependence: Under monopolistic competition, the firms are independent. Each firm produces unique product by brand and quality, which enable them to control over the price and output of the product to some extent. Any action taken by the firm regarding price and output has no significant effect on other firms. Thus, the firms are independent. 
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