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One of the core concepts of economics is the concept of market structure
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“Market structure the characteristics of a market, which determine the behaviour of firms within the market”
(Anderton, 2008:320)
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Taking into account those components, economists
usually identify three main types of the market structures: perfect competition, monopoly and
oligopoly
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On the opposite side
to the perfect competition, there is an oligopoly - a market, which is operated by a small
number of large companies (Beardshaw et al, 1998: 187)
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First, this essay will reveal the
perfect competition
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Finally, a judgment will be made about the consequences of few large
firms domination on the UK economy
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According to the Riley (2012a), the primary condition of perfect competition is a
relatively large numbеr of purchаsers and dealers
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Also, in perfect competition all market participants have an
absolute knowledge about the market, and each seller produces homogeneous or identical
product without brands and quality differences (Begg et al, 2005: 170-171)
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Firms can freely enter or leave the market
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However,Gillespie (2014: 203) argues that in reality, all of these conditions cannot
be met, therefore, perfect competition in its purest fоrm dоes nоt exist
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Anderton (2008: 324) believes that firms in perfect competition assumed to be profitmaximising
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In the short-run, it is possible for firms to make either losses or abnormal profits –
profits over and above the normal profits – “the minimum amount required to keep factors of
production in their current use" (Mankiw and Taylor, 2011: 302)
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Figure 1
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Each firm is ‘price taker’
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Each
firm will produce a profit-maximising output Q1, where MC=P1
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5
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5 per unit
of carrot
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The entry of
more firms will shift the industry supply curve from S1 to S2 and the quantity supplied in the
industry will increase to Q2
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Subsequently, the quantity supplied by the firm will drop to Q2, where MC=AC=P2
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This situation, when firms have no incentives to either enter or leave the
market, in other words, when firms make normal profits, known as long-run market equilibrium
(Maunder et al, 1995: 374-375)
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Figure 2
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As a result, firms in the long-run equilibrium are allocative
efficient because MC = P
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As a result, there is no wasting of
resources
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However, Beardshaw et al (1998: 208-209) argue that
perfect competition is relatively dynamic inefficient or inefficient over a period of time
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In addition, Harrison
et al (1992: 93) claim that the low level of profitability significantly slows down the research &
development
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Another market structure, which is most common in the modern world, is an oligopoly
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Firms in oligopoly are ‘price-makers’, not ‘price-takers’
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Bamford et al (2008: 138) claim thatoligopoly exist due to the high
barriers tothe entry, like high economies of scale and government regulations
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Furthermore, firms in the oligopoly may discriminate prices to increase profits – “the
selling of the same commodity to different buyers at different prices” (Bannock & Baxter 2011:
306)
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For instance, Ryanair airlines divide customers on first-class
and economy-class or priority boarding and other queue
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However, Begg et al (2005: 147-148) argue that the most important
characteristic of oligopoly markets is interdependence of thefirms within the market
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According toMaunder et al (1995:
411),it is almost impossible to predict the reaction of rival firms in the oligopoly
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For example,after
appearing of Tesco’s club card, Morrison recently introduced the loyalty card to compete for
market shares
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d
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Usually, this is the worst type of
the market structure because cartels set prices to increase profits and do not care about
research & development of products (Gillespie, 2014: 238)
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However, some firms avoid
punishment through the informal agreements
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Anderton(2008: 348-349) claims that the main
reason for breaking the cartel is cheating by members of the cartel
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Harrison et al (1992: 116) believe that cartels may exist only if there
is either a powerful firm, which ableto punish the others for cheatingor an absolute level of
trust between members of the cartel
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Figure 3 below illustrates the situation in the firms through the kinked demand
curve model that identifies this structure
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Kinked demand curve for a firm

Figure 3 demonstrates that firm in the competitive oligopoly
meets two demand curves: an elastic demand curve above
market price or P1 and inelastic demand curve below market
price
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The controversial possibility, when a firm decides to
reduce the price below the market price will lead to a price
war, because rivals will follow price reduction to protect the
market shares
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These
assumptions illustrate the danger of the changing price in a
competitive environment
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£

P1

D

0

Q1

Q

Source: Sloman, 2003: 185

From the Figure 3, it can be seen, that competing by the price is not a wise idea in the
competitive environment, therefore, firms usually compete for market shares by non-price
methods, like advertising, R&D and innovations
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Taylor& Weerapana (2010: 317) state that

the non-price competitive oligopoly is the most beneficial market structure because firms are
productively efficient
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Moreover,quick development of new technologies and innovations of this type of
oligopoly maximise the dynamic efficiency and the economic growth
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In summary, this coursework has examined the difference of perfect competition compared to
oligopoly and analysed the possible impact of the oligopoly on the UK economy
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The
consequences of the collusive oligopoly will be devastating for UK economy, because cartels
prevent the competition and innovations in the industry, resulting in slow economic growth,
while firms extract high prices from consumers
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As a
result, bоth sidеs оf the market will benefit from each other
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REFERENCE LIST
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(2008)
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5th edition
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Bamford, C
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& Walton, S
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OCR A2 Economics
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Bannock, G
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E
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The Penguin Dictionary of Economics
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Beardshaw, J
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, Cormack, P
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(1998)
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4th
edition
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Begg, D
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& Dornbusch, R
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Economics
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Berkshire: McGraw-Hill
Education
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(2008)
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http://www
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co
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htm
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Gillespie, A
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Foundation of economics
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Oxford: Oxford University Press
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, Smith, C
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(1992)
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Houndmills, Basingstoke,
Hampshire and London: Macmillan Press Ltd
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G
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P
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Economics
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Canada: Nelson Education Ltd
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, Myers, D
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& Miller, R
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(1995)
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3rd edition
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Riley, G
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Perfect Competition - Economics of Competitive
Markets
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net/economics/revision-notes/a2-micro-perfect-competition
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[Assessed 24th January 2015]
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(2012b)
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http://tutor2u
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html
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Sexton, R
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(2008)
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4th edition
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Sloman, J
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Economics
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Edinburgh: Pearson Education
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B
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(2010)
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6th edition
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The Economist
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d
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http://www
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com/economics-a-to-z/c#node-21529530
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