Comparing Market Structures

Now let's take a look at the graphs for the four market structures.

Perfect Competition Graph

Perfect competition graphs shows how demand is constant at a set price. Producers in this industry are price takers which means they must sell their products at the price the market sets. The market price is determined by thousands, or even millions of individuals. This type of market allows producers to achieve maximum allocative and productive efficiency. We can see this by looking at the graph and noting that the average and marginal costs are in line with the price and quantity.

Monopolistic Competition Graph

The graphs below show a monopolistically competitive market in both the short and and long run. In the short run, we can see that an economic profit (or normal profit) is earned but in the long run, only normal profits are earned. The graphs also show that the demand (represented by AR in these graphs) is somewhat flexible to price and producers do have some control over what price they choose to sell their products at. From looking at these graphs, we can determine the profit maximising quantity and price which is where Marginal Revenue (MR) meets Marginal Costs (MC). The break even points on these graphs is where Average Costs (AC) meets Average Revenue (AR).

Oligopoly Graph

The graph below shows what is called a kinked demand curve and can be seen in an oligopoly. This market is generally made up of a few large firms with similar products. Producers in this type of market are price setters which means they have moderate to substantial control over their market price. The kinked demand curve shows both elastic and inelastic sections as well as the best price and quantity to produce for maximum profits.

Monopoly Graph

This graph is very similar to the monopolistically competitive graph. One of the main differences between a monopolistically competitive firm and a monopoly is that a monopoly can earn economic profits in the long run. Once again, we can determine the profit maximising quantity and price which is where Marginal Revenue (MR) meets Marginal Costs (MC).

Game Theory

The Game Theory is defined as “a method of analyzing firm behaviour that highlights mutual independence among firms (Morris & Sayre).” The main idea behind the game theory is strategy; each player will evaluate a situation and make the decision that is best for them regardless of how that choice may affect other players (Dixit, Avinash & Nalebuff, Barry).

The game theory was first introduced in 1944 by John Von Neumann and Oskar Morgenstern (SiliconFarEast.com). It was developed and adjusted by many difference scholars over the years. Albert Tucker expanded on the Game Theory and invented the Prisoner’s Dilemma in 1950 (SiliconFarEast.com). Tucker talked about the different strategies that players are able to choose which can be represented in the form of a payoff matrix (see image on right for an example). John Nash later introduced a concept which is now called the Nash equilibrium. This is when no one player can change their strategy to better their position so they both choose a position that negatively impacts them (SiliconFarEast.com).

There are many examples of the Game Theory in today’s economy. One such example can be seen by looking at the movie industry. All Calgary theaters charge similar tickets prices and do not want to upset the balance by changing their prices. Theaters are well aware of the fact that they provide very similar products and each theater has to think about how the others will react before they make a price change. If one theater did decide to drop their price, they would likely attract more customers initially but if other theaters follow suit, they would lose those same customers and now the industry as a whole would be earning less profit. Businesses must continually evaluate how their competitors are acting and adjust their own strategies accordingly.

I mentioned a payoff matrix earlier in my blog. You may be wondering exactly how a payoff matrix works. Let me explain it for you. Say I had the option to either stay in my current job or apply for a better position at another company. Now let’s imagine that I have a co-worker that I know would like to apply for the same position. We could both choose to apply and hope the best person is hired leaving us with equal opportunities at the job. My second option would be to tell management about my co-workers intention to apply for the new job and consequently sway management to fire her, which could mar her employment record and lessen her chances of getting the new job. Likewise my co-worker could do the same to me. The third option that we both have is to stay in our current jobs so neither one of us would be hired at the other company. These choices could be visually shown by using a payoff matrix.

Let's look at the principles behind collusive and cartel actions. Collusion is defined as "an agreement among suppliers to set the price of a product or the quantities that each will produce (Morris & Sayre).” Cartel is described as "an association of sellers acting in unison (Morris & Sayre).” Both actions involve businesses agreeing to act together for the common good of each individual business. The goal is for businesses to generate greater individual profits by working together. Even though they are similar, one of the main differences between collusive and cartel actions is that collusion is illegal whereas cartel is not.

Dixit, Avinash & Nalebuff, Barry, Game Theory,

http://www.econlib.org/library/Enc/GameTheory.html,

site accessed on November 4, 2012

Morris, Alan; Sayre, John, Principles of Economics, p. 387 - 390

SiliconFarEast.com, Game Theory,

http://www.siliconfareast.com/game-theory.htm,

site accessed on November 4, 2012

Defining Monopolistic Competition

Monopolistic competition is a market which has many different sellers that are all selling similar products. The bossiness selling in a monopolistically competitive market have some control over the price the choose to sell their product at, but not a lot. If a business in a monopolistically competitive market were to price their product to high, the consumers would move on to one of the many other similar products available at a lower price.

The products sold in a monopolistically competitive market are considered to be differentiated products. This means that although the businesses are selling something similar, they each search for something in their product that distinguishes it from the rest of the products in the market. Product differentiation is extremely important for businesses because it helps consumers see their product as different, or better than the others on the market and ensures more sales for them.

Size:	Small Company	Medium Company	Large Company
Features:	Local Business (Atcom Systems)	Canadian Retail Business (Danier)	Major Sports Business (TaylorMade)
Differentiated Products	Service, Mobility (they come to you), Convenience	Location, Service, Luxury Products	Brand Names, Logos, Distinctive Packaging, Celebrity Endorsements
Control Over Price	Some	Some	Some
Mass Advertising	Word of Mouth, Internet, Fliers	Word of Mouth, Internet, Newspaper & Magazine Ads, Radio	Internet, Newspaper & Magazine Ads, Television, Billboards, Celebrity Endorsements
Brand Name Goods	Few	Some	Many