Types of markets
Competitive markets
- Competitive market - a market with many firms competing for customers.
- Competition - rivalry between firms to attract consumers through price, quality, service, choice or innovation.
- Barrier to entry - an obstacle that makes it difficult or expensive for a new firm to enter a market.
A competitive market normally has many sellers, consumer choice, relatively low barriers to entry and pressure on firms to respond to rivals. Products may be similar or differentiated by branding, quality and service.
| Effect of many firms | Likely result | Reason |
|---|
| Price | Lower or kept close to cost | Consumers can switch, so a firm that charges much more may lose sales. |
| Quality | Often improves | Firms try to protect reputation and win repeat customers. |
| Choice | Usually wider | Rivals differentiate products and target different preferences. |
| Profit | Usually limited in the long run | High profit attracts entry, while rivalry raises costs and lowers prices. |
| Possible advantages | Possible disadvantages |
|---|
| Lower prices, better quality, wider choice and pressure to be efficient | Small firms may be unable to gain economies of scale or fund major research |
| Innovation as firms try to gain an advantage | Advertising and duplicated facilities may waste resources |
| Poor firms can lose customers and leave the market | Intense pressure may reduce job security, wages or long-term investment |
Monopoly markets
- Monopoly market - a market with one seller.
- Monopoly power - the ability of a firm to influence price, output or other market conditions because consumers have few or no close alternatives.
A monopoly is the sole seller and is protected by high barriers to entry, such as legal rights, ownership of essential resources, very large start-up costs, strong network effects or control of technology. Consumers cannot easily switch to a rival.
| Effect of one firm | Likely result | Reason |
|---|
| Price | May be higher | The firm faces no direct rival and consumers have few alternatives. |
| Quality | May fall, but can improve | Weak rivalry reduces pressure, although reputation and regulation still matter. |
| Choice | Usually narrower within the market | Only one producer decides the product range. |
| Profit | Can be high and persistent | Barriers prevent new firms entering to compete away profit. |
| Possible advantages | Possible disadvantages |
|---|
| Large scale may lower ATC; high profit can finance research, investment and reliable networks | Higher prices, restricted output, less choice and weaker pressure to control costs |
| One network may avoid wasteful duplication in industries such as water supply | Poor service or slow innovation if consumers cannot switch |
| Long-term planning may be easier because revenue is more predictable | Economic power may influence suppliers, workers or government decisions |
Balanced judgement: Market outcomes depend on the strength of entry barriers, regulation, potential foreign or online competition, consumer information, economies of scale and how the firm uses its profit. One seller is not automatically inefficient, and many sellers do not guarantee perfect outcomes.