- Under perfect competition, many firms sell identical products, the price is set by the market;
- Under monopolistic competition, the price is still set by the market, but the products are more differentiated;
- With an oligopoly, the number of firms in the market is small, a high degree of interaction between them;
- With a monopoly, there is only one firm in the market, which itself sets prices for its unique product;
- To make decisions on pricing and release, there is a marginal analysis that gives an assessment of the demand and market price.
In the process of interaction between sellers and buyers in the market, the price of a product or service is formed. One of the main characteristics of the market is the degree of competition, in other words, the ability of the buyer or seller to influence the price of products, which determines the structure of the market itself. Various market structures imply not only a particular approach to the overall pricing processes but also output decisions. There are four main structures that have significant differences: monopoly, oligopoly, monopolistic competition, and perfect competition.
A monopoly means that there is only one company in the market. This company is characterized as a “price-maker,” which means almost complete freedom in pricing approaches for its product since there is no market experience on this issue (Mankiw, 2020). As a rule, the company’s primary client sector has no alternatives to choose from and is forced to put up with any changes in the company’s pricing policy. Features of monopoly apply to different scales, from local to global. At the highest level, it is possible to cite the example of developers of operating systems for computers and laptops, Microsoft or manufacturers, and miners of diamonds De Beers. Entering the market to compete with these companies is almost impossible and will require a massive amount of resources. The company decides on pricing and release only based on its analysis of the target audience’s market, demand, and purchasing power.
An oligopoly already includes several companies in the market, which may differ in the degree of interaction with each other. Some may form cartels to create monopoly conditions in the market, while others gravitate towards perfect competition (Mankiw, 2020). Companies like Apple and Android represent such a significant rivalry. Many companies in their fields also have little competition but do not reach the status of monopolists, as in the case of the Walt Disney Company. Decisions about the price and release of a company are most often made based on the “paradox of prisoners”: almost always, a decision that is beneficial for oneself will bring more benefits than a potentially beneficial one from cooperation, even if it is more profitable in the long run (Mankiw, 2020). Like a monopoly, an oligopoly is under the scrutiny of the antimonopoly services of various states, which track unjustified price increases and other violations of the rights of consumers of products.
Monopolistic competition is close to perfect competition and differs significantly only in differentiated products. In other words, the manufactured products of companies in this structure are not identical and, in some industries, cannot be identical by definition. The best example is the sphere of art: cinema, literature, music. Each product is unique, although there are quite a lot on the market, even at the local level, for example, recording studios and labels. Pricing is dictated by the market, while output is dictated by the companies themselves and depends on a variety of internal and external factors of the macro environment.
Finally, free competition is the rivalry between participants in the market economy for the best conditions for producing, purchasing, and selling goods. This balance is achieved by impartial conditions: market participants being entirely isolated, the dependence on the state of the economy over a period of time, and contest between players competing for the market leading position. Companies are called “price-takers” here, as they are entirely market-oriented in pricing, leaving little to no room for price changes (Mankiw, 2020). This market is filled with many identical products always in high demand: food, hairdressing, and pet products. Due to the high demand in the market, there are many companies. As a rule, there are practically no price control mechanisms under this structure since any high-priced product can be replaced by another market player that provides a more competitive offer.
Marginal analysis helps to make the most informed decisions regarding the release and pricing of products. With the help of this analysis, various situations with the release of a certain amount of products and the estimated price are calculated, and the most winning strategy is graphically found. In the case of perfect competition, companies depend on the average total cost curve and the market as a whole. At the same time, a product unit brings a near-zero profit to the company (Mankiw, 2020). In the case of a monopoly, the situation as a whole depends on demand, as well as on the number of products sold. If the demand is high and the quantity does not offer scalability, such as with the reasonably easy distribution of operating systems from Microsoft, then the price will rise accordingly (Mankiw, 2020). In the case of monopolistic competition, the difference between the loss minimizing and profit-maximizing points is relatively small because the price is almost identical to the average total cost in the graphical representation (Mankiw, 2020). Accordingly, they often produce less than in perfect competition in this structure, and there is capacity before an effective sale. Finally, in an oligopoly, marginal analysis is practically not used since companies depend on each other, and the nature of this dependence is subjective.
Reference
Mankiw, N. G. (2020). Principles of macroeconomics (9th ed.). Cengage Learning.