Features of Perfect Competition

Features of Perfect disputationContrast the features of utter(a) aspiration with those of oligopoly. (10)The comparison between perfect contest and oligopoly will be based on the fol modesting number of buyers and traffickers, temperament of product, and barriers to submission of menages.Number of buyers and coverersPerfect competition is a market expression that is characterised by m any(prenominal) buyers and sellers with each firms end product representing an insignifi flowerpott proportion of the nitty-gritty product. Hence, sellers lot non influence worths by changing its level of out(p)put. Thus, they accept the market monetary value as make passn i.e they atomic number 18 price takers. Each firm and thenly faces a perfectly elastic command curve as shown in fig 1a.An example of a market that comes close to the perfectly emulous model is that of agricultural outlying(prenominal)ming. How much the farmer sells his wheat for will depend on the prevailing pri ce of wheat in the market.On the former(a) hand, an oligopolistic firm produces a signifi peckt amount of the total market output. The seller can each influence the price or output. It can sell more than by lowering price or increase price but sell less. This indicates that the firms command curve is downward sloping.In addition, due(p) to the sm completely number of firms prevalent in the market, each firm right away makes its decisions based on the reaction of separate firms in the same industry. No firm can afford to ignore the actions and reactions of other firms in the industry. For example, there argon only a some car manufacturers in the US such(prenominal) as Chrysler, GM and Ford Motors. If Ford Motors wants to increase sales, it can lower the price of its cars so that some buyers will substitute from either Chrysler or General Motors but the increase in quantity demanded will be insignificant given that Chrysler and General Motors will follow the splay in pr ice. This behaviour can be summarized by the kinked demand curve. disposition of productIn perfect competition, each seller produces an identical product, thus they ar perfect substitutes for each other. Since consumers think that the products ar the same, they will not show any preference towards the goods of one firm over another. This mean that sellers are not able to arbitrarily raise their prices for fear that consumers switch to other firms. Firms in perfect competition are price takers, and the demand for their goods are perfectly price elastic, hence the horizontal demand curve. In oligopoly, firms may either be producing a homogenous product or a sortd product. When the product is differentiated, the oligopolist can increase the price and the output would not f tout ensemble significantly. This implies substantial market power for the firms in an oligopoly. notwithstanding when the good is homogenous standardized marque or aluminium, the firm is belike to differenti ate in terms of the services and terms of conditions, hence the downward sloping demand curve.Barriers to entrythither are no barriers to entry or exit in a PC industry so the markets will consist of a larger number of small sellers. The importation of this is that the firms in perfectly competitive industry will earn universal lettuces in the farsighted run as supernormal profit earned by the firms in the short run will be depleted by the entry of the innovative firms into the industry. It is relatively user-friendly to enlist a plot of land to grow wheat and in the causa that the farmer chose to give up wheat farming, he could easily ignore his lease with the landlord. The start up cost is low as all he needs are some simple tools and seedlings. In oligopoly, there are significant entry and exit barriers. For example, in car output, there are very high initial fixed costs such as the setting up of the assembly line and only if the firm produces a very large output level will the reasonable cost fall significantly. The lower cost associated with a bouffant output serves as an entry barrier for new firms as their initial demand is usually low. Exit is also difficult, as it is not easy to shut away of the firms fixed assets. Other forms of barriers could be patent rights, exclusive ownership of veritable raw materials and legal barriers. So the oligopolist can earn supernormal lucre up to now in the long run.2b. Discuss why oligopoly is a more common type of market structure compared to perfect competition. (15)Perfect competition is an ideal model and so it is difficult to find markets that support all these characteristics. There are some markets in the real world that approximates perfect competition. Examples of such markets are farming, the communication channel exchange market and the contradictory coin market. These markets possess some of the characteristics of PC as explained in part (a). However, even in such markets, some of the characteristics are hard to fulfil. For instance, buyers and sellers may not be price takers. In the stock exchange market, there are some individuals or institutions that can influence the price of shares done their large holdings of a particular companys shares. The product is also not homogenous if stock of different companies are considered., Thus, if they were to sell their shares, price will fall. Knowledge is not perfect either. Although buyers and sellers do hurt easy access to information through their brokers and the Internet, there are some who do have insider information and use up that to their profit. Moreover, managers tend to reveal more information about their companies to financial specialists earlier than to small investors.In the real world, most industries do not have that many firms. In fact, in industries such as automobiles, air-craft manufacturing industry, oil industry, steel industry, supermarket chains and pharmaceutical industry, the industry is dom inated by a few large firms. Most firms would rather face less competition so that their market power can be united and secured. Oligopoly is thus a more desired form of market structure as far as sellers are concerned.Oligopoly is a more common market structure. It can be attributed mainly to the high entry barriers. Barriers to entry refer to any impediments that prevent new firms from competing on an equal basis with existing firms in an industry. An effective barrier for new firms to enter the industry is substantial economies of descale. The production of some goods involves very high initial fixed costs. Good examples are the petroleum industry and the manufacturing of aircrafts. For example, Airbus and Boeing must construct huge expensive structures to hold the A380. Thus, for the production of such goods, the larger the output the greater is the economies of scale enjoyed by the firm. Such industries have very large Minimum Efficient Scale, and hence, only a few firms exi st in such industries.Economies of scale are not the only source of barrier to entry. Other barriers to entry can be the possession of master copy technical knowledge or superior reputation for tincture or efficiency. Take for example, high end sports cars like the Ferrari is such well known brand names that it is quite unsufferable for any new auto firms to replicate them. For years, they are the symbol of quality and luxury, an image that the carmakers have painstakingly cultivated. Production of such cars also gestates superior technical knowledge, which is jealously guarded by the manufacturers. Thus it is not easy for new firms to enter such industries. In addition, existing firms could have washed-out millions on advertising to build and maintain brand loyalty. It will require a substantial period of high advertising costs and low revenues for new entrants if they want to establish themselves. Also, they can spend large amounts on advertising to make it difficult for a n ew entrant to differentiate its product.With the high entry barriers, firms are able to earn supernormal meshwork in the long run and have the financial strength to quit the entry of new firms. Such firms can also adopt wolfish pricing to further keep out competitors. Their huge profits suspend them to cut prices drastically to drive out competitors. They can maintain glut production capacity as a signal to a authorisation entrant that with little notice, they could easily saturate the market and leave the new entrant with little or no revenue.Besides, huge profits stick out firms to spend generously on RD. The discovery of new and better products allows them to fight more effectively in the market and also keep out other firms. For instance, in the pharmaceutical industry, millions of dollars are required to discover a new vaccine or a new drug. Hence the bearing of high entry barriers results in many oligopolies.Globalisation and liberalizationWith change magnitude global isation, many domestic firms are threatened by the entry of big foreign firms or MNCs. Bigger firms have a competitive advantage in terms of pricing. Domestic firms can survive as long as there is government legislation to prevent the entry of foreign firms. But most governments are liberalizing their domestic industries. In order to struggle with foreign firms, domestic firms have to merge. A fusion would safeguard their survival of the fittest as well as to allow them to compete more effectively. For instance, the merger of DBS patois with POSB and UOB with OUB , are all meant to expand the size of each bank so as to better compete with other international banks such as Citibank and Standard Chartered etc when MAS liberalize the financial sector to upgrade competition. Hence globalisation has increased the tendency for mergers and the formation of oligopolies.ConclusionThere are not many industries in the real world that fulfil the characteristics of the perfectly competitiv e model given it is an ideal model. On the other hand, the characteristics of an oligopoly are more easily met. The nature of production is more gilt to an oligopolistic kind of market. There are many advantages to macrocosm big. Some firms are big due to high entry barriers natural or man-made, bit others expand internally or externally through mergers and acquisition in response to a changing external environment. The main reason for oligopoly being a common market structure can be attributed to benefits of economies of scale which gives firms the incentive to merge and be large. It will lower their costs and give them higher returns to meet potential competition and as a consequence, they have huge incentives to erect barriers to deter entry by new firms, and to consolidate their position.