Advantages of perfect competition:

1. There is consumer sovereignty in a perfect competitive market. The consumer is rational and he has perfect knowledge about the market conditions. Therefore, he will not purchase the products at a higher price.

2. In the perfectly competitive market, the price is equal to the minimum average cost. It is beneficial to the consumer.

3. The perfectly competitive firms are price-takersand the products are homogeneous. Therefore it is not necessary for the producers to incur expenditure on advertisement to promote sales. This reduces the wastage of resources.

4. In the long run, the perfectly competitive firm is functioning at the optimum level. This means that maximum economic efficiency in production is achieved. As the actual output produced by the firm is equal to the optimum output, thereis no idle or unused or excess capacity. 

 

3. Imperfectly Competitive Market:

In economic terms, imperfect competition is a market situation under which the conditions necessary for perfect competition are not satisfied. In other words, imperfect competition can be defined as a type of market that is free from the stringent rules of perfect competition. Unlike perfect competition, imperfect competition is characterized by differentiated products. The concept of imperfect competition was firstly explained by an English economist, Joan Robinson.

In addition, under imperfect competition, buyers and sellers do not have any information related to the market as well as prices of goods and services. In imperfect competition, organizations dealing in products or services can influence the market prices of their output.

There are different forms of imperfect competition, which are shown in Figure-3:

 

Monopoly:

The term monopoly has been derived from a Greek word Monopolian, which signifies a single seller. Monopoly refers to a market structure in which there is a single producer or seller that has a control on the entire market. This single seller deals in the products that have no close substitutes.

Some of the definitions of monopoly given by different economists are as follows:

According to Prof. Thomas, “Broadly, the term monopoly is used to cover any effective price control, whether of supply or demand of services or goods; narrowly it is used to mean a combination of manufacturers or merchants to control the supply price of commodities or services.” According to Prof. Chamberlain, “Monopoly refers to the control over supply.” According to Robert Triffin, “Monopoly is a market situation in which the firm is independent of price changes in the product of each and every other firm.”

From aforementioned definitions, it can be concluded under monopoly the demand, supply, and prices of a product are under the direct control of the seller. In monopoly, the slope of the demand curve is downward to the right.

Following are the main features of the monopoly market structure:

i. Single Seller: Refers to the main feature of monopoly.Under monopoly market conditions, there is a single seller or producer of products. In such a case, buyers are not left with any other option; therefore, they are required to purchase from the only seller. This leads to a full control of the seller on the supply of products in the market. In addition, under monopoly, the seller enjoys the power to decide the price of products. Therefore, in monopoly, there is no distinction between an organization and industry as one organization constitutes the whole industry.

ii. No Substitutes of the Product: Implies that under monopoly, the seller deals in the product that is unique in nature and does not have close substitutes. The differentiation of products is absent in case of monopoly market.

iii. Barriers to Entry: Refers to the main cause of the existence of monopoly market. Under monopoly, there are a number of entry barriers that restrict the entry of new organizations. These barriers include exclusive resource ownership, copyrights, high initial investment, and other restrictions by government.

iv. Restriction on Information: Implies that under monopoly, information is restricted to the organization and people working within the organization. This information is not available to others and can be transferred only in the form of copyrights and patents. Monopoly is a condition that prevents the entry of new organizations in the existing market due to various prevailing barriers.

Some of the barriers to entry of new organizations are as follows:

i. Legal Restrictions: Refer to barriers that are imposed by a government for public welfare. In India, postal, railways, electricity, and state roadways are the best examples of old monopolies. Earlier, in these industries, the entry of new organizations was restricted. However, after economic reforms of 1990s, the Government of India has allowed the entry of private sectors in these industries. Besides this, the government also forms monopolies in private sectors by providing patents, trademarks, and copyrights to those private organizations that have capability of reducing prices to minimum. Such monopolies are termed as franchise monopolies.

ii. Resource Ownership: Helps in sustaining the monopoly of an organization. Some of the organizations traditionally have control over the raw materials that are necessary for the production of specific goods, such as aluminum, bauxite, and diamond. Generally, such resources are limited in nature. Therefore, organizations that have acquired these resources attain monopoly in the industry. For example, Iraq and Iran have monopoly on oil wells and South Africa has monopoly of diamonds. Such monopolies are termed as raw material monopolies. These monopolies can also arise due to specific knowledge about a technique of production. For example, Japan and China have monopoly in electronic goods industry.

iii. Efficiency in Production: Arises as a result of a long-term experience, innovation capability, financial power, less marketing cost, managerial competence, and market finance accessibility at lower cost. Efficiency in production helps in lowering down the cost of production. Consequently, an organization achieves an edge over its competitors and attains monopoly in the industry. Such organizations also obtain support and protection from the government.

iv. Economies of Scale: Refers to the technical reason for the existence of monopolies in an imperfect market. In case an organization finds an appropriate production scale at minimum cost in the long-run, then it would prefer to cut the prices of products in the short-run. This helps an organization to eliminate competitors from the market and attain monopoly. When the organization attains monopoly, then it would be difficult for new organizations to enter and sustain in the industry. Such type of monopolies is termed as natural monopolies. Natural monopolies arise either due to technical situation of efficiency or are formed by a government for social welfare.

Types of Monopolies

1. Natural Monopoly – market situation where the costs of production are minimized by having a single firm produce the product (e.g. public utility companies, oil pipeline in Alaska)

2. Geographic Monopoly – based on absence of other sellers in a certain geographic area (e.g. gas station or drugstore in small town)

3. Technological Monopoly – based on ownership or control of a manufacturing method, process or other scientific advance (e.g. certain pharmaceutical drugs) a. Patent – exclusive right to manufacture, use or sell invention (usually good for 20 years). b. Copyright – authors, art (good for their lifetime plus 50 years)

4. Government Monopoly - monopoly owned and operated by the government (e.g. military, water and sewage) A monopoly maximizes profit by producing output when MR = MC and by charging maximum price that consumers are willing to pay for that output.

Price and Output Determination

A monopolist like a perfectly competitive firm tries to maximize his profits. A monopoly firm faces a downward sloping demand curve, that is, its average revenue curve. The downward sloping demand curve implies that larger output can be sold only by reducing the price. Its marginal revenue curve will be below the average revenue curve. The average cost curve is ‘U„ shaped. The monopolist will be in equilibrium when MC = MR and the MC curve cuts the MR curve from below. In figure , AR is the Average Revenue Curve and MR is the Marginal revenue curve. AR curve is falling and MR curve lies below AR. The monopolist is in equilibrium at E where MR = MC. He produces OM units of output and fixes price at OP. At OM output, the average revenue is MS and average cost ATC. Therefore the profit per unit is MS-MT = TS. Total profit is average profit (TS) multiplied by output (OM), which is equal to HTSP₁. The monopolist is in equilibrium at point E and produces OM output at which he is earning maximum profit. The monopoly price is higher than the marginal revenue and marginal cost.

What is an efficient output for society?

At output Q* and price P*, the Monopolistic firm is producing at a lower price but a higher output than a profit or revenue-maximizing firm. This is the efficiency of monopolies. Thus, there is a misallocation of resources because of monopoly power. Since monopolies aren’t forced to produce at minimum average cost, so there is productive inefficiency. 

Advantages

1. Monopoly firms have large-scale production possibilities and also can enjoy both internal and external economies. This will result in the reduction of costs of production. Output can be sold at low prices. This is beneficial to the consumers.

2. Monopoly firms have vast financial resources which could be used for research and development. This will enable the firms to innovate quickly. 

3. There are a number of weak firms in an industry. These firms can combine together in the form of monopoly to meet competition. In such a case, market can be expanded. Although there are some advantages, there is a danger that monopoly power might be misused for exploiting the consumers.

Disadvantages

1. A monopolist always charges a high price, which is higher than the competitive price. Thus a monopolist exploits the consumers.

2. A monopolist is interested in getting maximum profit. He may restrict the output and raise prices. Thus, he creates artificial scarcity for his product.

3. A monopolist often charges different prices for the same product from different consumers. He extracts maximum price according to the ability to pay of different consumers.

4. A monopolist uses large-scale production and huge resources to promote his own selfish interest. He may adopt wrong practices to establish absolute monopoly power.

5. In a country dominated by monopolies, wealth is concentrated in the hands of a few. It will lead to inequality of incomes. This is against the principle of the socialistic pattern of society.

Methods of Controlling Monopoly

1. Legislative Method: Government can control monopolies by legal actions. Antimonopoly legislation has been enacted to check the growth of monopoly. In India, the Monopolies and Restrictive Trade Practices Act was passed in 1969. The objective of this Act is to prevent the unwanted growth of private monopolies and concentration of economic power in the hands of a small number of individuals and families.

2. Controlling Price and Output: This method can be applied in the case of natural monopolies. Government would fix either price or output or both.

3. Taxation: Taxation is another method by which the monopolistic power can be prevented or restricted. Government can impose a lump-sum tax on a monopoly firm, irrespective of its level of output. Consequently, its total profit will fall.

4. Nationalization: Nationalizing big companies is one of the solutions. Government may take over such monopolistic companies, which are exploiting the consumers.

5. Consumer’s Association: The growth of monopoly power can also be controlled by encouraging the formation of consumers associations to improve the bargaining power of consumers.

Monopolistic Competition:

The term monopolistic competition was given by Prof Edward H. Chamberlin of Harvard University in 1933 in his book Theory of Monopolistic Competition. We have discussed the concepts, perfect competition and monopoly. However, the real market situation is just the middle way between these two extreme market conditions.

The term monopolistic competition represents the combination of monopoly and perfect competition. Monopolistic competition refers to a market situation in which there are a large number of buyers and sellers of products. However, the product of each seller is different in one aspect or the other.

Some of the definitions of monopolistic competition given by different economists are as follows:

According to J.S. Bains, “Monopolistic competition is market structure where there is a large number of small sellers, selling differentiated but close substitute products.” According to Baumol, “The term monopolistic competition refers to the market structure in which the sellers do have a monopoly (they are the only sellers) of their own product, but they are also subject to substantial competitive pressures from sellers of substitute products.”

Thus, under monopolistic competition, sellers deal in products having close substitutes. In monopolistic competition, the number of sellers is very large; therefore, it resembles perfect competition. On the hand, the products produced by the sellers in monopolistic competition are close, but not perfect substitutes of each other. Thus, the product of every seller is unique, which is a feature of monopoly market. Therefore, it can be said that monopolistic competition is the integration of perfect competition and monopoly. Therefore, the characteristics of monopolistic competition are also the combination of perfect competition and monopoly.

Some of the characteristics of monopolistic competition are as follows:

i. Large Number of Sellers and Buyers: Refers to one of the important characteristic of monopolistic competition. Similar to perfect competition, the size of sellers and buyers is also large in monopolistic competition.

ii. Differentiated Products: Constitute the characteristic feature of monopolistic competition. Under monopolistic competition, the products of sellers are different in many respects, such as difference in brand, shape, color, style, trademarks, durability, and quality. Therefore, buyers can easily differentiate among the available products in more than one way. However, under monopolistic competition, products are close substitutes of each other.

iii. Free Entry and Exit: Implies that under monopolistic competition there are no restrictions imposed on organizations for their entry and exit from the market. This is the same condition as prevailing under perfect competition.

iv. Restricted Mobility of Factors of Production: Implies one of the crucial features of monopolistic competition. Under monopolistic competition, the factors of production as well as goods and services are not perfectly mobile. This is because if an organization is willing to move its factors of production or goods and services, it has to pay heavy transportation cost. This leads to difference in the prices of products of organizations.

v. Price Policy: Affects the market prices of a product. Similar to monopoly, average and marginal revenue curves of an organization also slopes downward in case of monopolistic competition. This implies that an organization can sell more only in case it lowers down the prices of its products. On the other hand, under monopolistic competition, if the prices of products are higher, then the buyers would switch to other sellers due to close substitutability of products. In such a scenario, the organization would not be able to sell more. Therefore, organizations do not enjoy complete control over price in monopolistic competition.

All conditions of perfect competition are met except products are NOT identical.

Product differentiation – real or perceived differences between competing products in same industry (e.g. Pure life Water vs. Dasani Water, Crest toothpaste vs. Colgate).

Nonprice competition – use of advertising, giveaways, or other promotions designed to convince buyers that a product is unique (e.g. Coke vs. Pepsi). - Profit is maximized by producing output when MC = MR. 

In Figure,

Short Period Equilibrium of a Monopolistic competitive firm with Profit MC and AC are the short period marginal cost and average cost curves. The sloping down average revenue and marginal revenue curves are shown as AR and MR. The equilibrium point is E where MR = MC. The equilibrium output is ON and the price of the product is fixed at OP₁.The difference between average cost and average revenue is SQ. The output is OM. So, the supernormal profit for the firm is shown by the rectangle P₁QSR. The firm by producing OM units of its commodity and selling it at a price of OP₁ per unit realizes the maximum profit in the short run. The different firms in monopolistic competition may be making either abnormal profits or losses in the short period depending on their costs and revenue curves.

In the long run, if the existing firms earn super normal profit, the entry of new firms will reduce its share in the market. The average revenue of the product will come down. The demand for factors of production will increase the cost of production. Hence, the size of the profit will be reduced. If the existing firms incur losses in the long-run, some of the firms will leave the industry increasing the share of the existing firms in the market. As the demand for factors becomes less, the price of factors will come down. This will reduce the cost of production, which will increase the profit earned by the existing firm. Thus under monopolistic competition, all the existing firms will earn normal profit in the long run.

Price Discrimination

Price discrimination means the practice of selling the same commodity at different prices to different buyers. If the monopolist charges different prices from different consumers for the same commodity, it is called price discrimination or discriminating monopoly. Price discrimination may be defined as “the sale of technically similar products at prices which are not proportional to marginal cost”. For example, all cinema theatres charge different prices for different classes of people.

Conditions of Price Discrimination

Price discrimination is possible only if the following conditions are fulfilled.

1. The demand must not be transferable from the high priced market to the low priced market. If rich people do not buy the high-priced deluxe edition of the book, but wait for the low-priced popular edition to come out, then personal discrimination will fail.

2. The monopolist should keep the two markets or different markets separate so that the commodity will not be moving from one market to the other market. If it is possible to buy the product in the cheaper market of the monopolist and sell it in the dearer market, there can never be two prices for the commodity. If the industrial buyer of cheap electricity uses it for domestic consumption, then trade discrimination will fail. The above two conditions are essential to adopt price discrimination. 

Disadvantagesof Monopolistic competition

1. Unemployment: Under monopolistic competition, the firms produce less than optimum output. As a result, the productive capacity is not used to the fullest extent. This will lead to unemployment of resources.

2. Excess capacity: Excess capacity is the difference between the optimum output that can be produced and the actual output produced by the firm. In the long run, a monopolistic firm produces an output which is less than the optimum output that is the output corresponding to the minimum average cost. This leads to excess capacity which is regarded as waste in monopolistic competition.

3. Advertisement: There is a lot of waste in competitive advertisements under monopolistic competition. The wasteful and competitive advertisements lead to high cost to consumers.

4. Too Many Varieties of Goods: Introducing too many varieties of a good is another waste of monopolistic competition. The goods differ in size, shape, style and colour. A reasonable number of varieties would be desirable. Cost per unit can be reduced if only a few are produced.

5. Inefficient Firms: Under monopolistic competition, inefficient firms charge prices higher than their marginal cost. Such type of inefficient firms should be kept out of the industry. But, the buyers„ preference for such products enables the inefficient firms to continue to exist. Efficient firms cannot drive out the inefficient firms because the former may not be able to attract the customers of the latter.

Oligopoly:

The term oligopoly has been derived from two Greek words, oligoi means few and poly means control. Therefore, oligopoly refers to a market form in which there are few sellers dealing either in homogenous or differentiated products. In India, the aviation and telecommunication industries are the perfect example of oligopoly market form. The aviation industry has only few airlines, such as Kingfisher, Air India, Spice Jet, and Indigo. On the other hand, there are few telecommunication services providers, including Airtel, Vodafone, MTS, Dolphin, and Idea. These sellers are closely interdependent to each other. This is because each seller formulates its own pricing policy by taking into account the pricing policies of other competitors existing in the market.

Some of the popular definitions of oligopoly are as follows:

In the words of Prof. George J. Stigler, “Oligopoly is a market situation in which a firm determines its marketing policies on the basis of expected behavior of close competitors.” According to Prof. Stoneur and Hague, “Oligopoly is different from monopoly on one hand in which there is a single seller. On the other hand, it differs from perfect competition and monopolistic competition also in which there is a large number of sellers. In other words, while describing the concept of oligopoly, we include the concept of a small group of firms.” According to Prof. Leftwitch, “Oligopoly is a market situation in which there is a small number of sellers and activities of every seller are important for others.” In oligopoly market structure, the price and output decided by a seller affects the sales and profit of its competitors. This may either lead to a situation of conflict or cooperation among sellers.

The main characteristics of oligopoly are as follows:

i. Few Sellers and Many Buyers: Refers to the primary feature of oligopoly. Under oligopoly, few sellers dominate the entire industry. These sellers influence the prices of each other. Moreover, in oligopoly, there are a large number of buyers.

ii. Homogeneous or Differentiated Products: Implies another important characteristic of oligopoly. In oligopoly, organizations either produce homogenous products (similar to perfect competition) or differentiated products (as in case of monopoly). If organizations produce homogeneous products, such as cement, asphalt, concrete, and bricks, the industry is said to be pure or perfect oligopoly. On the other hand, in case of differentiated products, such as automobile, the industry is known as differentiated or imperfect oligopoly.

iii. Barriers in Entry and Exit: Prevents the entry of new organizations. The barriers of entry and exit distinguish the oligopoly market from monopolistic competition. In oligopolistic market, new organizations cannot easily enter the market due to various legal, social, and technological barriers. In such a case, existing organizations have a complete control over the market.

iv. Mutual Interdependence: Refers to one of the important characteristic of the oligopoly market structure. Mutual interdependence implies that organizations are influenced by each other’s decisions. These decisions include pricing and output decisions of organizations. In monopoly and perfect competition, organizations do not take into consideration the decisions and reactions of other organizations, therefore, the decision of organizations in such types of market structures are independent. However, in oligopoly, an organization is not able to take an independent decision.

For example, in oligopoly, a few numbers of sellers compete with each other. In such a case, the sale of one organization depends on its own price of products as well as the price of competitor’s products. This mutual interdependence differentiates oligopoly from rest of the market structures

v. Lack of Uniformity: Refers to another important characteristic of oligopoly. In oligopoly, organizations are not uniform in their sizes. Some organizations are very large in size while some of them are very small. For example, in small car segment, Maruti Udyog has the share of 86%, while Tata and Cielo have very low market share.

vi. Existence of Price Rigidity: Implies that organizations do not prefer to change the prices of their products in oligopoly. This is because the change in price would not be profitable for an organization in oligopoly. In case, an organization reduces its price, its rivals also reduce prices, which adversely affect the profits of the organization. In case, the organization increases prices, it would lose buyers.

Collusion is formal agreement between sellers to set specific prices or to otherwise behave in a cooperative manner (For example, OPEC = Organization of the Petroleum Exporting Countries). - Price-fixing is a form of collusion where firms establish the price of a product or service, rather than allowing it to be determined naturally through free market forces. -

The demand curve below is kinked. At higher prices the demand is elastic because if you raise your price, other firms will not match it. At lower prices, the demand curve becomes inelastic; if you lower your price, other firms will match it.