Types of Competition: Perfect, Monopoly, Monopolistic & Oligopoly

Types of competition are the various types of market systems in a particular industry market that incorporate different businesses or companies that compete with each other to optimize their market share. The four different market system structures that decide the types of competition are

1. Perfect competition
2. Monopoly market
3. Monopolistic competition
4. Oligopoly markets

These systems are divided as per the number of suppliers or the number of buyers in the market, plus how companies in competition are handling the supply and demand cycle in their target market.

4 Types of Competition on the Basis of Market Structures

Different types of competition are based on the type of market system in which different companies compete with each other. Let us have a look at the five types of competition that might occur in different industries here and now-

1) Perfect Competition

Perfect competition occurs in a hypothetical market in which there are a large number of buyers and sellers that sell homogeneous or identical products at fixed prices. Firms in perfect competition are price takers, as such firms cannot influence the market price of the associated product. Some of the notable features of perfect competition:

1. A large number of Buyers and Sellers

In a perfectly competitive market, there are many buyers and sellers alike. As a result, one individual seller has a negligible impact on the total supply in the market. This seller’s share is so insignificant to the total market supply that the seller cannot influence the prices in the market.

Similarly, as the number of buyers in such a market is so large, the demand for a single buyer does not influence the market demand for that product or service. As a result, even the buyer cannot have any significant impact on the price.

The prevailing prices in the market are determined by the interaction of the market forces of demand and supply. The seller in such a market is hence, known as a price taker.

2. Homogeneous Products sold

All the sellers sold in this market are entirely identical to each other. As a result, these homogeneous products are perfect substitutes for each other. Homogeneity of products has other implications as well apart from perfect substitutability.

A seller cannot charge a higher price for this product as the buyer can switch vendors and get the same product for the standard price. This ensures that the prices remain uniform in this industry and that no seller has the incentive to tamper with the prices.

If even a single seller reduces the prices, then a price war emerges, which leads to the seller who first reduced the price as the ultimate loser.

3. Freedom of Entry and Exit

Freedom of entry and exit is determined by natural or artificial barriers to entry or exit in the industry. Sellers can quickly enter or exit the market as per their choice. Freedom of entry and exit leads to an important implication.

In the long run, all sellers will earn only average profits. Expected profits are the profits necessary to run a business and carry out activities. It is the minimum profit required for sustenance. All abnormal profits and losses are wiped out from this industry in the long run.

This is because market supply adjusts to remove any abnormal profits or losses in the long run by creating incentives for people to enter or exit the market at any time.

Other features of perfect competition include perfect knowledge, mobility of factors of production and goods, and the absence of transportation and selling costs.

Examples:

• Farmers markets where several farmers come to sell similar products
• Retail Forex exchange markets
• Individual eBay sellers auctioning identical products
• Street food vendors in highly populated cities
• Online retailers selling new books

2) Monopoly Competition

Monopoly refers to that market structure characterized by a single seller selling a product with no close substitutes. It is the exact opposite of perfect competition and in this, only one producer of a particular good or service exists. Key characteristics of a monopoly competitive market are:

1. Single Seller

Since there is only a single seller in the industry, there is no difference between firm and industry. This gives the monopolist complete control over the prices. As a result, a monopolist is also known as a price maker.

2. Price Discrimination

The product sold by the monopolist has no close substitutes, only distant substitutes. As a result, the monopolist can charge different consumers different prices for the same product. As a result, the monopolist faces absolutely no competition and makes supernormal profits.

3. High Barriers to entry

There are strong entry barriers, which is why there is only a single seller in the market. Monopolies are created due to the existence of such barriers. There are various types of barriers likes:

4. Natural Barriers to Entry

A natural monopoly exists when the monopolist has the required technology to fulfill the entire market demand.

5. Legal Barriers to Entry

Legal monopolies exist when the entry of firms is restricted by the law, for example, in the case of licensing and patents.

6. Other Barriers

These barriers can range from extremely high research and development costs to control over raw materials.

Examples:

• Microsoft’s hold on the operating system market
• Google’s dominance in the search engine industry
• Facebook’s social media monopoly
• Amazon’s control over online retail
• De Beers’ previous stronghold on the diamond industry

3) Monopolistic Competition

Monopoly and perfect competition are two hypothetical market structures that are at the two ends of a spectrum. A combination of the two that meets somewhere in the middle of this spectrum is monopolistic competition. In this market structure, many buyers and sellers sell differentiated products that are closely related to other products available in the market.

Like the perfect competition, it has numerous competitors, plus like monopoly competition, each of the competitors would be different from the others in a way that one can charge more or lesser price than the other. For example, the market for music in which there are many singers, and each one is different from the other. Some of the notable highlights of such competition are-

1. A large number of Sellers

Just like perfect competition, many sellers sell differentiated products in monopolistic competition. This has various implications like each firm has enough power to at least influence its price but has little to no influence over the prices of other firms. There exists competition in the market, unlike that of monopoly, as there are a large number of sellers in the market.

2. Product Differentiation

Product differentiation means that there exist fundamental differences in the products like shape, color, quality, packaging, etc. As a result, buyers differentiate between the products of various sellers and are willing to pay different prices for different goods. A brand can even create brand loyalty for its product in such a market.

3. Non-Price Competition

Firms in this industry engage in non-price competition by using various marketing tools like after-sale services, gifts, promotions, etc. This helps them increase both customers and revenue without decreasing prices.

Examples:

• Apple Inc.’s distinctive design and user-friendly interface give it a competitive advantage in the tech industry.
• In the airline industry, where only a few airlines dominate, each offering differentiated services.
• Oil companies deal with the prevailing market price, operating in direct competition with each other.
• Pharmaceutical companies selling similar products, where each drug’s efficacy can create a significant edge.
• Agricultural firms sell produce where the quality can greatly vary due to biotic and abiotic factors.

4) Oligopoly

This type of market structure is referred to as oligopoly. Oligopoly refers to such a market structure with few but large firms that are selling either homogeneous or differentiated goods. In this market structure, firms are mutually dependent on one another when it comes to making pricing and output decisions.

A unique form of oligopoly is known as a duopoly in which only two firms together own all or nearly all of the market share for a particular product or service. A duopoly is the simplest or the most basic form of oligopoly, and an example of this could be Boeing and Airbus.  Some of the key characteristics of oligopoly are:

1. Few Firms

An oligopoly is characterized by a few firms that own most of the market share. These few yet large firms dominate the market, and there is cut-throat competition amongst the few markets that exist in this market structure.

The actions of one firm can quickly impact the overall functioning of the other firm within the industry. The reason for the existence of a few firms is due to the various barriers to entry into this market structure. The most common reason for such a barrier is the existence of substantial capital requirements, which is no easy feat for a firm.

2. Price Rigidity

Prices in an oligopoly tend to remain sticky or rigid because if any firm even attempts to alter its prices (or output), rival firms will surely retaliate. This creates a price war. As mentioned earlier, a price war always ends with the initiator of this war being the ultimate loser.

3. Mutual Dependence

Firms under oligopoly are interdependent, which implies that the actions of any single producer have a bearing on all the firms in the market. As a result, the actions and reactions of others must be considered by any firm in this industry. The probable reaction of others is always a part of any planning done by such firms in this industry.

If an oligopolistic firm sells a homogeneous product, then the industry is known as a pure or perfect oligopoly. Whereas, if the firms produce differentiated products, then the industry is known as an imperfect oligopoly.

Examples:

• The airline industry, with only a few airlines controlling the majority of the market
• In the petroleum industry, a few global giants set the prevailing market prices
• The smartphone industry, characterized by a few key players like Apple and Samsung
• The automobile industry, dominated by a handful of manufacturers
• The broadcast media industry, where a few networks control most of the market share

FAQs

1) What is a competition?

Competition in the context of market structure refers to the rivalry among businesses striving for the same customer or market. It ranges from perfect competition, where many firms offer the same products and must accept prevailing prices, to monopoly, where one company dominates and sets the prices. In between, you’ll find oligopoly (only a few sellers) and monopsony (only one buyer).

2) What are the benefits of competition?

Competition encourages innovation, improves product quality, and drives down prices, thereby benefiting consumers. It also stimulates growth for businesses as they strive to gain a competitive edge in the market. Finally, it encourages firms to operate efficiently and make just enough profit to stay in business.

3) What happens when species compete?

When two or more species compete for the same resources, they limit each other’s growth. This can be beneficial in that it prevents one species from becoming dominant and eliminating other species in an ecosystem. However, competition can also lead to decreased biodiversity as some species are unable to cope with competing pressures. In these cases, the environment may suffer from a lack of diversity and the species that are left in competition may struggle to survive.

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