PureCompetition and Oligopoly
Thisis also referred to as a perfect competitive market. This marketstructure is whereby many buyers and sellers are dealing withhomogenous products. It is characterized by there being noparticipant large enough to have the market power which will enablehim to influence the price levels. This is because there are so manysellers supplying homogenous products. Other characteristics includeinfinite buyers and sellers, free entry and free exit, prices ofproducts and quality are anticipated to be understoodtoconsumers and producers, free long-term adjustments are allowed byfactors of production in the long run period to change in marketconditions and production technology is assumed to be exhibitingconstant returns to scale. Also in perfect competition, firms areprice takers and not price makers (Schmidt,et al. 1250).Therefore, the seller does not have any power to determine theselling price but has to go by the price prevailing in the market.
Thefact that the selling price is constant, this makes the demand curvein perfect competition to be horizontal. In the short run, a firm inperfect competition could either make supernormal profits or losses.This is because there are still very few firms in the market sincecompetitors are not aware that the business is profitable. In thiscase, the few firms will make supernormal profits. On the other hand,if there are so many firms beyond what the market can accommodate,the prevailing prices will be too low and all firms will be makinglosses.
Allfirms will be making normal profits in the long run at this point.This is because, if in the short run, firms were making supernormalprofits more firms will join the competition since there are freeentry and exit in the market. Therefore the supernormal profits whichfirms were making will be wiped out as more firms join thecompetition. On the other hand, if in the short run the firms weremaking losses because they were too many, some of them will exit themarket, and the few remaining firms will be left making normalprofits.
Thisrefers to the market structure dominated by large few firms. Thenumber of sellers (firms) is small enough for other sellers to takeaccount of each other that is, if one seller changes his prices oruses non-price strategies, his or her rivals would react. This isreferred to as an oligopolistic dependency. The interdependence inoligopolistic firms explains the price rigidity among the firms.According to Zhang, Cheng, et al 28) the theory of kinked demandcurve suggests that firms under oligopoly go through two forms ofdemand curves price increase and reduction in price that is slightlyinelastic.
If one firm reduces its prices, competitors have no option but tohave their prices reduced by at least the same margin or more to havetheir market share retained. When the price is lower, each firm hasthe same market share which implies that firms are on the inelasticsection at the demand curve. For the firms in an oligopolisticcompetition to maximize profits and reduce uncertainty, they willhave to collude by agreeing on the prices of each market share. Aform of open collision is known as a cartel whereby firms producedifferently but act like determinants of price and output.
Themarginal revenue is discontinuous on the chart at the output levelwhere the demand curve has a kink. The demand curves kink explainsthe marginal revenue curves nature. At point E and output Q themarginal revenue curve falls vertically from the higher price, themarginal revenue relates to the less elastic demand curve. Where themarginal cost equal to marginal revenue the firm maximizes itprofits. Normally, the marginal cost curve will go through themarginal revenue curve passing between point X and Y whichcorresponds to the discontinuous part of the marginal revenue curve.
Zhang,Cheng, et al. "Oligopoly competition in time-dependent pricingfor improving revenue of network service providers with complete andincomplete information." IEICETransactions on Communications 98.1(2015): 20-32.
Schmidt,Klaus M., Martin Spann, and Robert Zeithammer. "Pay what youwant as a marketing strategy in monopolistic and competitivemarkets." ManagementScience 61.6(2014): 1217-1236.