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In this essay, I will analyze and compare the two extremes of market structure - Perfect competition and Monopoly.

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Introduction

Market structure is divided into four categories: Perfect competition, Monopolistic competition, Oligopoly and Monopoly. The difference among them is the degree of competition. In this essay, I will analyze and compare the two extremes of them: Perfect competition and Monopoly. Perfect competition is the most competitive kind of market structure. It is considered as an ideal form of economic organization for providing goods and services to consumers as efficiently as possible. Its characteristics are: 1 There are many firms in the industry, thus an individual firm's contribution to total industry supply is so small that whether a firm produces at full capacity or not at all, market price will not be significantly affected. 2 There is a freedom of entry into and exit from the industry firms. There are no significant financial, legal, technological or other barriers to new firms entering the industry or existing firms leaving it. 3 Each firm is a price taker and has no influence on the market price. They are unable to affect the prices by changing the amount of product that are offers for sale. This is because the output is such a small portion of total industry supply that has nearly no effect on market supply. ...read more.

Middle

'Public utilities, for instance, are privately owned firms that provide an essential public service. They are granted a monopoly because it is felt that competition would be harmful to the public interest.' (Harvey, 1969) Sometimes the power of government is used to determine which industry or firm is to produce certain good and services, e.g. legal barriers such as license, patent, copyright and trademark. Licensing creates a type of monopoly by restricting the ability of firms to enter certain industries and occupations, copyrights and patents. Patent grants an inventor a monopoly over a product process for a certain period time. Copyrights are similar in effect to patents in that they give authors exclusive legal control over the production and reproduction of their work for a certain period of time. Sunk cost is also a major barrier of entry. It is a kind of fixed cost. For instance, Gas or water companies built and own the pipelines all over the country. These are the sunk costs because they cannot be removed and the cost can only be recovered through continuous sales. If a firm wants to enter into this industry, he will have to build another system of pipelines or it will lack of access to distribute channels. ...read more.

Conclusion

(2) Second degree price discrimination, where producers charge different prices for 'blocks' of output. (3) Third price discrimination, where the seller divides consumers into groups or segments such as age group, and charges a different price to each group. Here I am only going to assess the first degree (perfect) competition because it will make the comparison more significantly. As we can see the difference between these two figures in the diagram above, the firm sells its goods and services at the maximum price in figure (b), both the consumer surplus and deadweight welfare loss is covered by producer surplus. Therefore, no loss will be in this kind of monopoly. However, this kind of situation is unlikely to happen. In summary, the implications of changing from perfect competition to a monopoly charging a single price is the increase in producer surplus, the decrease in consumer surplus and also the change in deadweight welfare loss. Since each degree of price discrimination has its own characteristics, It is very hard to judge if the price discrimination is beneficial or not because different people have their own views on it. People pay high prices may think it is not fair of paying such high prices while others pays relatively low prices for the same goods or even better ones. However, sellers/producers will always benefit from it in most cases. ...read more.

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