Monopoly and competition | Definition, Structures, Performance, & Facts

monopoly and competition , basic factors in the structure of economic markets . In economics , monopoly and competition signify certain complex relations among firms in an industry. A monopoly implies an exclusive possession of a market by a supplier of a product or a service for which there is no substitute. In this situation the supplier is able to determine the price of the product without fear of competition from other sources or through substitute products. It is generally assumed that a monopolist will choose a price that maximizes profits .

Types of market structures

Competition is directly influenced by the means through which companies produce and distribute their products. Different industries have different market structures—that is, different market characteristics that determine the relations of sellers to one another, of sellers to buyers, and so forth. Aspects of market structure that underlie the competitive landscape are: (1) the degree of concentration of sellers in an industry, (2) the degree of product differentiation, and (3) the ease or difficulty with which new sellers can enter the industry.

Concentration of sellers

Seller concentration refers to the number of sellers in an industry together with their comparative shares of industry sales. When the number of sellers is quite large, and each seller’s share of the market is so small that in practice he cannot, by changing his selling price or output, perceptibly influence the market share or income of any competing seller, economists speak of atomistic competition. A more common situation is that of oligopoly, in which the number of sellers is so few that the market share of each is large enough for even a modest change in price or output by one seller to have a perceptible effect on the market shares or incomes of rival sellers and to cause them to react to the change. In a broader sense, oligopoly exists in any industry in which at least some sellers have large shares of the market, even though there may be an additional number of small sellers. When a single seller supplies the entire output of an industry, and thus can determine his selling price and output without concern for the reactions of rival sellers, a single-firm monopoly exists.

Product differentiation

The structure of a market is also affected by the extent to which those who buy from it prefer some products to others. In some industries the products are regarded as identical by their buyers—as, for example, basic farm crops. In others the products are differentiated in some way so that various buyers prefer various products. Notably, the criterion is a subjective one; the buyers’ preferences may have little to do with tangible differences in the products but are related to advertising, brand names, and distinctive designs. The degree of product differentiation as registered in the strength of buyer preferences ranges from slight to fairly large, tending to be greatest among infrequently purchased consumer goods and “prestige goods,” particularly those purchased as gifts.

Market Volatility: Identifying and Quantifying Investment Risks

Britannica Money

Market Volatility: Identifying and Quantifying Investment Risks

Ease of entry

Industries vary with respect to the ease with which new sellers can enter them. The barriers to entry consist of the advantages that sellers already established in an industry have over the potential entrant. Such a barrier is generally measurable by the extent to which established sellers can persistently elevate their selling prices above minimal average costs without attracting new sellers. The barriers may exist because costs for established sellers are lower than they would be for new entrants, or because the established sellers can command higher prices from buyers who prefer their products to those of potential entrants. The economics of the industry also may be such that new entrants would have to be able to command a substantial share of the market before they could operate profitably.

The effective height of these barriers varies. One may distinguish three rough degrees of difficulty in entering an industry: blockaded entry, which allows established sellers to set monopolistic prices, if they wish, without attracting entry; impeded entry, which allows established sellers to raise their selling prices above minimal average costs, but not as high as a monopolist’s price, without attracting new sellers; and easy entry, which does not permit established sellers to raise their prices at all above minimal average costs without attracting new entrants.

Get a Britannica Premium subscription and gain access to exclusive content. Subscribe Now