In the world of economics, the behavior of businesses in competitive markets. The behavior of businesses in competitive markets has emerged as one of the most discussed subjects. It is based on the fact that a majority of the markets in various economies are either competitive or have some degree of competitiveness. Competition arises when there are many companies that offer similar goods or once that customers can easily substitute (Mahoney & Weyl, 2017). In other words, the more similar the products are, the more competitive the market becomes. Nonetheless, market’s competitiveness is influenced by the behavior of a firm. For instance, firms that engage in collusive behaviors may provide an impediment to competition. It is therefore important to note that competitive markets may be characterized by varying degrees of competition (Quickonomics, 2018). Therefore, in explaining the competitiveness principles, it would be important to provide an in-depth analysis of the perfect and imperfect competition.
Perfect Competition
Mahoney & Weyl (2017) describes these market structures as the purest form of competition in a market. All businesses offer identical or similar types goods and services. On the other hand, market players have no control over prices with each having a small share in the market. The market prices are determined by the forces of supply and demand. Based on the diagram below PK is the market price and seems firms in this market are price takers, they are forced to adjust and therefore sell their outputs are price OE or PK.
It is important to note that consumers in this market have sufficient knowledge of the industry. Other characteristics include; market players seeking to maximize their profits, the market exists free of any barriers to exit or entry and no government involvement. Finally, there is an assumption that firms present in this market have an equal resource access. Therefore, any production technologies improvements can be attained by one company spilling it over to other market suppliers. Certainly, it is not possible to make any economic profit in this market. Ultimately, if the aforementioned conditions are not attained then the market cannot be termed as being perfectly competitive.
However, Azevedo and Gottlieb (2017) opine that this type of market structure exists only as an abstract concept that cannot be applicable in the real world. It is based on the fact that businesses in the real world attempt to make their products unique from those of their competitors. Companies start advertising, cutting prices to attract more consumers and occasionally raise the prices in an attempt to increase their profits. Nonetheless, the model is significant as it can be compared to other models (Mahoney & Weyl, 2017).
The rice market offers the closest example of this type of market structure where there are many sellers and buyers with the former offering numerous identical products (Quickonomics, 2018). However, while the rice market may manifest as a perfect competition market, it is disadvantaged by minor differences such as in the products as well as seller preferences among other factors. Another example may be seen when buying tomatoes in a vegetable market; in such a situation, there exist numerous buyers selling the tomatoes as well as innumerable buyers willing to purchase them (Quickonomics, 2018). The prices and demand in the market are similar. The buyers benefit from having many substitutes in cases where the products or services that they wish to buy fall short of the preferred quality or become expensive. Businesses generate just enough revenues to sustain them in the market. It is based on the fact that when such firms make excess revenues, others enter the market and force revenues down to the minimum.
Despite being impossible to achieve the market structure, in reality, it remains an extremely relevant concept. Azevedo and Gottlieb (2017) note that it assists in explaining the various economic behaviors and market mechanisms. The market structure prevents the possibility of a monopoly, as there are no barriers to entry or exit. Similarly, no advertisement is necessary since all products are identical and the consumers have sufficient knowledge of those products. There is an equal dispensation of all knowledge, such as information and prices on products and therefore this transparency prevents corruption.
Imperfect Competition
As opposed to perfect competition, the market structure is more common in the real world. As the name outlines, they are imperfect in nature. Presently, most firms and industries have adhered to it to rack in surplus profits (Mahoney & Weyl, 2017). Since the firms have the ability to influence the market means, they are able to determine their profits. Further, firms offer different products and services meaning that despite the fact that they mostly satisfy similar needs, their minor differences enable the customers to distinguish one product from the other. Given these differentiated products and services, the consumers develop preferences for some products or businesses (Quickonomics, 2018). For this reason, consumers become willing to spend more on products and services from specific businesses. Pepsi and Coca-Cola, which are arch rivals in the beverage industry, provide a good example where this market prevails as they both hold a huge share in it. The main types of this market structure include monopolistic and oligopoly competition, oligopsony and monopsony.
In an oligopoly economy, consumers for products and services are many while the sellers are few. An example identified in the United States is the cable television industry. Mahoney and Weyl (2017)
observe that while few active businesses exist in an industry, they compete fiercely with one another. As opposed to perfect competition, enterprises offer similar but distinguishable products. Given the small number of existing businesses, one business has the power to influence the prices in the market. In fact, firms in an oligopoly economy collaborate to control the market prices as firms benefit from significant shares in the market. In such a type of a market structure, there is no perfect knowledge and high barriers to entry facilitating few numbers of players in the market.
Monopolistic competition and imperfect competition may be identified as the same; the latter is a generic description given to all market structures lying anywhere between a monopoly and a perfect competition. Therefore, Azevedo and Gottlieb (2017) avert that a monopolistic competition falls under imperfect competition as well as oligopolistic market structures. Oligopsony and monopsony, on the other hand, are counterpoints to oligopoly and monopoly. Unlike those discussed earlier, these markets have few consumers but numerous sellers or businesses. An example of a monopsony is the defense industry in the United States where many companies create products and attempt to sell them to one buyer. Similarly, the case is seen where less than five companies purchase all the tobacco grown globally to make cigarettes and other tobacco products. In an oligopsony and monopsony, only the buyer can manipulate the prices in the market and does so by playing the competitors against each other.
To diagram provides a proper illustration to highlight the difference between perfect competition and monopoly. The perfect competition equilibrium is OQ at which point the price is OP; P=MC. On the other hand, in the monopoly structure the equilibrium would be OQ1 would and this point MC=MR. Therefore, the monopoly price is higher while its output less and this is due to the fact they lack competitors in which case they can increase the price when they want.
Conclusion
In conclusion, it has been noted that competitive markets are characterized through multiple businesses offering identical or close substitute products and services. These businesses can exist either in a perfect competition or an imperfect competition. In a perfect competition, products offered are homogeneous, the market players cannot influence the market prices, and the consumers have no preferred preferences. On the other hand, markets that are imperfectly competitive have differentiated products as well as differentiated products. As a result, specific seller possesses some degree of market power. In other cases, such as in an oligopsony or monopsony, the buyer owns such power and does so through playing the competitive sellers against each other.
References
Azevedo, E. M., " Gottlieb, D. (2017). Perfect competition in markets with adverse selection. Econometrica, 85(1), 67-105.
Economics Discussion.net (2018). Difference between Monopoly and Perfect Competition. Retrieved 21 February 2018, from http://www.economicsdiscussion.net/differences-between/difference-between-monopoly-and-perfect-competition/12554
Economicsconcepts.com. (2018). Perfect Competition - Definition - Features/Characteristics or Conditions - Impotance - Diagram/Figure - Distinction Between Pure Competition and Perfect Competitions - Economicsconcepts.com. Retrieved 21 February 2018, from http://economicsconcepts.com/perfect_competition.htm
Mahoney, N., " Weyl, E. G. (2017). Imperfect competition in selection markets. Review of Economics and Statistics, 99(4), 637-651.
Quickonomics. (2018). Perfect Competition vs Imperfect Competition - Quickonomics. Retrieved 21 February 2018, from https://quickonomics.com/perfect-competition-vs-imperfect-competition/
