In market economies, there are a variety of different market systems that exist depending on the industry and the companies within that industry. It is crucial for small business owners to understand what type of market system they are operating in when fixing the prices and the making the decisions of production or when determining whether to enter or leave a particular industry.
The type of market you are in determines your business strategy which is required. Strategies for consumer markets are entirely different from that of industrial markets. These markets deal in bulk product selling whereas consumer products involve breaking the bulk. Costing and marketing is a critical function for both types of markets.
There are four major types of markets are perfect competition, monopoly, oligopoly, monopolistic competition.
- PERFECT COMPETITION
It is a market system types which is featured by numerous buyers and sellers. According to the theoretical definition, the perfect competition has an infinite number of buyers and sellers. It has many market players. Thus, it is impossible for anyone to make any change in the prices or to alter the prevailing prices of the market. If they try to do so, the other buyers and sellers have so many alternatives to choose from.
FEATURES OF PERFECT MARKET
The perfect market condition has the below-mentioned features:
- Free and perfect competition
In a perfect market, there are no checks either on the buyers or sellers. They are free to buy or sell to any person. It means there is no monopoly in the market.
- Cheap communication and transport
If the change in prices would be frequent, there will be no uniform price. There have to be cheap and efficient means of transport and communication are a must. The changes should be equally adjusted so that it can be quickly transported.
- Wide extent
Sometimes the market is wide, and it is regarded the same as a perfect market. In the wide market, the commodity has permanent and universal demand. The product should be portable. The means of communication and transport is quick. The division of labour should be extensive.
- Numerous firms
In this market, a product is produced and sold by a large number of firms. Since there is a large number of firms, therefore each firm is supplying only a small part of the total supply in the market. Thus no one firm has any market power. It implies that no firm can influence the price of the commodity instead all has to accept the price set by the forces of market demand and supply. The firms are price-takers and not price-makers.
- A large number of buyers
In a market with perfect competition, there is a large number of buyers and each demand a small part of the total market supply of the product. Hence, no single buyer is in a position to influence the market price decided by the forces of market demand and supply.
- Homogenous product
In a perfectly competitive market, all the firms produce and supply the identical products. It means that the products of all the firms are perfect substitutes for each other. As a result of this, the price elasticity of demand for a firm’s product is infinite.
- Free entry and exit
There is no restriction on the entry and exit of the competitors in the market. Any buyer or seller can leave the market or enter the market at any time.
- Perfect knowledge
In a perfectly competitive market, the firms and the buyers possess accurate information about the market. It indicates that no buyer or firm is ignorant about the price prevailing in the market.
A monopoly is the exact opposite form of the market system as perfect competition. In a pure monopoly, there is only one producer of a particular good or service and no substitute. In such a market, the marketers can charge whatever price they wish due to the absence of competition, but their income would be limited by the ability or the willingness of customers to pay their price.
FEATURES OF MONOPOLY
The monopoly has only one seller and a large number of buyers
There is only one seller in the market which has a large number of buyers. As the customers would be a large ratio but they would be buying from the single seller.
- No substitute
There shall not be any close substitute for the product sold by the monopolist. There is the negligible cross-elasticity of demand between the product of the monopolist and other.
- Hard to enter the market
In the monopolistic market, it is quite hard to enter as a new firm even when the firm is making abnormal profits.
- Price maker
Monopoly is the market situation when the seller is the price maker, and the customers are the price takers. The customers do not have any option of switching from one seller to another. So they have to accept the price what the marketer is providing.
An oligopoly is similar in many ways to a monopoly. The primary difference is that rather than having only one producer of a good or service, there are a handful of producers or at least a handful of producers that make a dominant majority of the production in the market system. While oligopolists do not have the same pricing power as monopolists, it is possible without diligent government regulation, that oligopolistic will collude with one another to set prices in the same way a monopolist would.
FEATURES OF OLIGOPOLY
- Power of monopoly
There is a clement of monopoly power in oligopoly. Since there are only a few firms and each firm has a significant share of the market. In its share of the market, there is the control of output and price. Thus an oligopoly has some monopoly power.
- Firms are interdependent
Under perfect competition, there are many small firms. And no single firm is strong enough to affect the price or the output. So the firm does not care about the actions and the reactions of the firm.
- Firms have a conflicting attitude
Under oligopoly, two types of conflicting attitudes are found in the firms. On the other hand, firms realise the disadvantage of mutual competition and desire to combine to maximise their collective profits. This leads to the formation of collusion. On the other hand, the desire to maximise the profit of the individual profit may lead to conflict and antagonism. Thus, the firms come into clash with one another on the question of distribution of benefits and allocation of markets.
- Monopolistic competition
It is a type of market system combining elements of a monopoly and perfect competition. In a perfectly competitive market system, there are numerous competitors in the market. The difference is that each competitor is sufficient differential from the others that some can charge greater prices than a perfectly competitive firm. An example of monopolistic competition is the market for Bollywood. There are many artists but each artist is different, and one cannot be the substitute for other.
- A large number of buyers and sellers
Each firm has its control over the price policies to some extent. It is assumed that any price of the firm would not get affected by the reaction of the other firms. Thus, we have the independent prices.
If a firm reduces its price, the gains in sales will be slightly spread over many of its rivals so that the extent to which each of the rival firms suffers will be very small. Hence the rivals will have no reason to react.
- Free entry and exit of firms
Like the perfect competition, under monopolistic competition also, the firms can enter or exit freely. The firms will enter when the existing firms are making super-normal profits. With the entry of new firms, the supply would increase which would reduce the price and hence the existing firms will be left only with normal benefits.
- Product differentiation
Another feature of monopolistic competition is the product differentiation. It refers to a situation when the buyers of the product differentiate the product from other. The products are not altogether different; they are slightly different from others. Thus, each firm producing each firm has the monopoly of its product.
Thus, the students pursuing MBA and have their specialisation in the marketing has to study the markets so that they can decide further about their future.