An ideal market is one with perfect competition, where price is set only on the basis of demand and supply. However, there are various factors that intervene and distort the market. In fact, there are various non-competitive markets where the competition is almost non-existent. Let us learn about a few such markets like monopoly, oligopoly etc.
Types of Markets
In the world in different market economies, there exist different types of markets. This depends on the sector, industry and the various companies operating in that sector or industry or geography. It is imperative that all businessmen or players in the marketplace understand the type of market they are currently operating in or may operate in, in future.
This understanding is crucial in making important decisions. For instance, this is required while making pricing and production decisions. This is also required when assessing if one should enter or exit the particular marketplace. The five broad types of market system in an economy are Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly, and Monopsony. In this article, we will cover Monopoly, Monopolistic Competition and Oligopoly.
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In a pure monopoly market, there exists only a single producer for a specific good or only one provider of a specific service. Another condition critical for a monopoly is the absence of reasonable substitute for the particular good or service. In such kinds of market systems, the players in the monopoly are at an advantage and are able to demand any rate for the good or service.
In a market characterized as a monopoly, there are multiple factors like government issued licenses, control of resources or ownership of the same, trademarks, copyright or patent and expensive starting costs make a player the single or unique seller in the market. The imposition, restrictions is a followed reaction of these factors in the market. Moreover, monopolies often tend to possess information which is unknown to the other market players. Hence, the advantage.
This is primarily because of the lack of competition and absence of substitutable goods or services. In case of necessary goods, the overall revenue knows no bounds. In other cases like for luxury goods, the overall revenue is limited. This is according to the willingness of the customer to spend or pay for the said goods. To achieve a monopoly, one has to offer a product that is different from ones that already exist in the market. Product differentiation is the key to a monopoly market.
Barriers in a Monopoly Market
- Legal Barriers: Copyrights or patents issued to the seller may cause other players to refrain from producing the same product. These rights to protect the innovation often help in creating the monopoly situation.
- Control of Resources: This happens a case where the producer is the sole provider or seller of the raw materials required to manufacture a product. Due to unavailability of raw materials, other sellers may not be able to encroach market territory, thus creating a monopoly.
Example of Monopoly: The Indian Railways has created a monopoly in the railroad transportation sector. The economies of scale of operations pose as a barrier for new entrants. Also, the restrictions by the government of India have stopped private players from entering and breaking down the monopoly market structure.
An oligopoly market is in many ways similar to a monopoly market. This is because of the presence of goods that are almost standardized in nature. The main difference that exists between a monopoly and oligopoly is in the number of market players. Unlike monopoly that has only one play or producer of a good or provider of service, in an oligopoly, there are a multiple but a limited number of producers that make up for a major part of the market system.
In an oligopolistic market, the producers are limited. However, the pricing power is not similar to that in a monopoly. They cannot price the product unreasonably. However, in the absence of government intervention and regulations, the players in an oligopoly market may collude. This implies that they together may determine and set prices and control them like in a monopoly.
Example of oligopoly: The Indian airline industry is an example of classic oligopoly market structure. The number of players is limited. Along with this, the types of goods and service offered are almost standardized. Lack of product and service differentiation ensures that the prices are controlled. The players have an almost equal market share and can collude and set prices in the absence of regulations.
A monopolistic competition constitutes a type of market which combines the different characteristics of a monopoly market and a market with perfect competition. This implies that in a monopolistic competition, there are multiple players or competitors like perfect competition markets. The key difference lies in the fact that an individual competitor differentiates himself from the other players. This can be done by charging higher prices or by offering varied services.
Instances of monopolistic competition may be seen in the books industry. There are multiple writers, but each writer differs his product from others. This also implies that there work is not easily substitutable by another.
Solved Question for You
Q: Oligopoly is one where ______
- the market of a particular commodity consists of more than one seller
- number of sellers is few
- both of the above
- none of the above
Ans: The correct answer is “C”. In an oligopoly, there is more than one seller so it is not a monopoly. However, the number of sellers in the market is very limited. They all sell the same product and they are not price setters.