Perfect competition is the most competitive market structure out of the four. Under perfect competition, the main features are:
1) There are a large number of firms. The large number means that each firm’s output is small in relation to the size of the market. Also, it means that firms act independently of each other and the actions of each one do not affect the actions of the others.
2) All firms produce identical or homogeneous products. The products produced by the firms in each industry are identical, and are referred to …show more content…
At the level of the industry, total welfare (consumer plus producer surplus) is maximum, and MB = MC.
Monopolistic competition is the second most competitive market structure. In monopolistic competition, some main features are:
1) There are a large number of firms. This is similar to perfect competition, where the large firm number ensures that each firm has a small share of the market, and that each firm acts independently of the others.
2) There are no barriers to entry and exit. This assumption is also similar to perfect competition in that there are no significant barriers to entry of new firms into the industry.
3) There is product differentiation. Unlike in perfect competition, where firms in each industry produce an identical product, in monopolistic competition each firm produces a product that is different from any other. Product differentiation can be achieved by:
a) Physical differences – products may differ in size, shape, materials, texture, taste, packaging, etc. (think, for example, of the variety of clothes, shoes, books, processed foods, …show more content…
Below are its characteristics:
1) There are a small number of large firms. Oligopolistic industries are dominated by a small number of large firms, though in any one industry the firms are likely to vary in size.
2) There are high barriers to entry. Barriers to entry include economies of scale, making it very difficult for new firms starting on a small scale to compete due to very high costs; legal barriers such as patents (the pharmaceutical industry); control of natural resources; aggressive tactics such as advertising or threats of takeovers of potential new firms. An additional barrier to entry in oligopoly involves high start-up costs (the costs of starting a new firm) associated with developing a new or differentiated product. Many established oligopolies spend enormous sums on product differentiation and advertising, making it difficult for new firms to match such expenditures.
3) Products produced by oligopolistic firms may be differentiated or homogeneous. Differentiated products include