Market Intervention- Part 2
Types of markets
Imperfect
Perfect
In practiice, all markets are imperfect but there are different types of imperfect markets. There are three basic types of imperfect markets
Perfect Markets are a theoretical extreme, but they are studied in Economics to help us understand the behaviour of markets. Although perfect markets do not exist, some markets come close, e.g. the Stock Exchnage.Perfect Markets have the following characteristics
A large number of buyers- There are so many different buyers of the product that the actions of one individual buyer cannot affect the market, enough to affect the price.
Homongeneous products- Consumers must believe that each suppliers product is identical to those of other suppliers, and they are therefore perfect substitutes for one another. Not only must the goods be the same, they must appear to be the same
A Large number of frims (sellers)- there are so many firms that none is big enough to have any influence on the market price. The firms are therefore "price takers" i.e. they have to sell at the price set by the market
No barriers to entry or exit- is must be easy for firms to enter and leave an industry
Perfect Information- Consumers and producers must have perfect knowledge about what prices are being charged by all firms in the market.
Oiigopoly
Monopolistic Competition
Monopoly
Strictly speaking, a monopolistic is a sole seller, i.e. he/she is the only person selling a particular good or service so there is only one firm in the market. In a monopoly, a monspolistic has the power to influence the market price by controlling the supply. Provided they can keep out potentional competitors, by existence of entry barriers, monopolies have the ability to make high profits. e.g. Scottish Water, MIcrosoft
The word oligopoly comes from the Greek word "oligos" which means "few". Therefore an oligopoly is a market which is dominated by few large firms. e.g. the market for newspspers. A market dominated by two firms e.g. the market for fast food restaurant burgers, is called a duopoly
Monopolistic Competion is also very common in the real world. One example of monopolistic competition is the clothing industry; there are many other examples.
Pricing Strategies
The pricing strategy adopted by firms is largely determined by the type of market in which they are operating and the level of competition they are facing.
In Monopoly markets, monopolies are "price markers" and often practice "cost plus" pricing. The mark up is often based on the price the market leader will bear, i.e. the highest price the firms think consumers are prepared to pay
In Oligopolistic markets, oligopolies try to sell at cost plus, but usually sell at the price set by the market leader. Firms which sell at a higher price than the leader run the risk of losing most of their customer
In perfect (or near perfect) markets, each firm is so small that it cannot influenced price. The price is set by the interaction of the market demand and supply curves and each firm has to accept this price
In Monopolistic Markets, pricing policy depends on how successful the firms have been in making their products appear different (product differentiation). The more different a firms product appears to be, the more control it has over the price. Otherwise, it will have to sell at the price set by the market.