Assumptions behind a Perfectly Competitive Market 1.

Many suppliers each with an insignificant share of the market this means that each firm is too small relative to the overall market to affect price via a change in its own supply each individual firm is assumed to be a price taker 2. An identical output produced by each firm in other words, the market supplies homogeneous or standardised products that are perfect substitutes for each other. Consumers perceive the products to be identical 3. Consumers have perfect information about the prices all sellers in the market charge so if some firms decide to charge a price higher than the ruling market price, there will be a large substitution effect away from this firm 4. All firms (industry participants and new entrants) are assumed to have equal access to resources (technology, other factor inputs) and improvements in production technologies achieved by one firm can spill-over to all the other suppliers in the market 5. There are assumed to be no barriers to entry & exit of firms in long run which means that the market is open to competition from new suppliers this affects the long run profits made by each firm in the industry. The long run equilibrium for a perfectly competitive market occurs when the marginal firm makes normal profit only in the long term 6. No externalities in production and consumption so that there is no divergence between private and social costs and benefits. Monopoly A pure monopoly is a single supplier in a market. For the purposes of regulation, monopoly power exists when a single firm controls 25% or more of a particular market. Formation of monopolies 1. Monopolies can form for a variety of reasons, including the following: 2. If a firm has exclusive ownership of a scarce resource, such as Microsoft owning the Windows operating system brand, it has monopoly power over this resource and is the only firm that can exploit it. 3. Governments may grant a firm monopoly status, such as with the Post Office, which was given monopoly status by Oliver Cromwell in 1654. The Royal Mail Group finally lost its monopoly status in 2006, when the market was opened up to competition. 4. Producers may have patents over designs, or copyright over ideas, characters, images, sounds or names, giving them exclusive rights to sell a good or service, such as a song writer having a monopoly over their own material. 5. A monopoly could be created following the merger of two or more firms. Given that this will reduce competition, such mergers are subject to close regulation and may be prevented if the two firms gain a combined market share of 25% or more. 1. oligopoly 2. An oligopoly is a market dominated by a few large suppliers. The degree of market concentration is very high (i.e. a large % of the market is taken up by the leading firms). Firms within an oligopoly produce branded products (advertising and marketing is an important feature of competition within such markets) and there are also barriers to entry.

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Another important characteristic of an oligopoly is interdependence between firms. This means that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions. This creates uncertainty in such markets which economists seek to model through the use of game theory

Game theory may be applied in situations in which decision makers must take into account
the reasoning of other decision makers. It has been used, for example, to determine the formation of political coalitions or business conglomerates, the optimum price at which to sell products or services, the best site for a manufacturing plant, and even the behaviour of certain species in the struggle for survival. KEY FEATURES OF OLIGOPOLY A few firms selling similar product Each firm produces branded products Likely to be significant entry barriers into the market in the long run which allows firms to make supernormal profits. Interdependence between competing firms. Businesses have to take into account likely reactions of rivals to any change in price and output