Perfect Competition vs. Monopoly

On this edition of Oznomics, I define the two extreme market models Perfect Competition & The Monopoly with my own version of it and the economist definition. I also mention since they don't actually exist in the real world I take a detour and give examples that come close to both extreme market models. I also define the terms, monopolistic competitions and oligopoly, as well as providing examples for them since those exist in the real world. I would then go into the similarities and differences between perfect competition and monopoly. I would then conclude the podcast by giving my thoughts on what extreme model I would prefer if I was the consumer or the producer.

Podcast by Michael Kolawole

Transcript

[MUSIC]

Kate: Hey everyone. Welcome to Oz-onomics, a podcast created for and by students in introductory economics classes at SUNY Oswego.

GABRIELLA: In this series, we'll have discussions about various economic principles and how they apply to our day to day lives.

KATE: Are you ready?

GABRIELLA: Let's go.

[MUSIC]

Hi, everyone. My name is Michael Kolawole, I will be your host for today on another edition of OZnomics where Economics becomes easier for Oswego students to understand, where you get your money that you pay for your tuition worth. Here on Oznomics, we break economics in a way you can understand, where you need another alternative to understand your economic class. Today’s Topic I will be covering the two extreme market models: Perfect Competition and the Monopoly. I will also be comparing the similarities and differences between them and what you rather have since neither of them technically occur in the real world. Perfect Competition vs. Monopoly, what would you rather have? In order to understand what you rather have between these two extreme market models one must first understand what they are and how they work. Topic 1: We first begin with Perfect Competition: If average person who don’t really to know economics were to ask: What is a perfect competition? You can tell them Perfect Competition is when any business in the world are selling the same thing, haves many competitors, but cannot influence the market. Now if you were to ask an economist what is a perfect competition? They would tell you something similar along these lines: a market structure where each firm faces many competitors that sell identical products so that no firm has any market power. They would also stress on the 4 conditions that need to be met which are: 1. the industry has many firms and many customers 2. all firms produce identical products 3. sellers and buyers have all relevant information to make rational decisions about the product being bought and sold 4. firms can enter and leave the market without any restrictions—in other words, there is free entry and exit into and out of the market. It’s also interesting to add, that when asked if a perfect competition exists in our world? You say no, they don’t technically occur in the real world due to no market truly meets all the requirements of being considered a perfect competitive market. The term is more so used to compare other markets. An example of a close perfect competition: However, there is some scenarios that do come close to a perfect market such as the agriculture market. Let’s say you wanted to grow some potatoes. Since the potatoes are homogenous they cannot be easily differentiated. Also, there’s so many potatoes around the world, that none of them people selling them have no market power. The potatoes being sold would meet the first three requirements of any firms, large number of buyers and sellers, and the sellers and buyers have all the relevant information to make rational decisions about the product being bought and sold. However, what stops from being in a perfect competition is the barriers to entry especially when considering the fact that processing companies, grocery stores, supermarkets exist with certain restrictions to follow. Topic 2: Monoplies The next extreme economic model would be the monopoly and no the game of monopoly but an actual monopoly. My definition of a monopoly is when there’s only one firm that controls the market. If an economist were to tell you what is an monopoly? They would say a situation in which one firm produces all the output in a market. Basic Conditions to be met for just a monopoly are having one firm operating in the market, having high barriers to entry, and no substitutes available. They would also tell you there is two type of monopoly which is a legal monopoly being when a laws prohibit or severely limit competition and the other is natural monopoly which is when the barriers to entry are something other than legal prohibition. In order for a firm to be considered a monopoly at least legally they would need a: patent, trademark, copyright, & trade secrets which is falls under the intellectual property. A patent is basically a legal right to make, use or sell your item for limited time. A trademark is basically a symbol/name to identify the good and once registered it’s only used by the firm. An example of this with Nike: Just Do It A copyright is basically a legal protection to prevent people from copying, using it for profit use, commercial purposes, their original works. An example of this being used would come when Facebook blocks your Live Video from going public due to music from Drake being used in the video. It’s interesting to know that the copyright last the whole person life plus 70 years. In order for a firm to be considered a natural monopoly is when they possess the economies of sale and sole ownership. Economies of sale is when firm decreases averages for the long term as the level of output increases. As with perfect competition, a monopoly does not really exist. However, there have been some examples that came to close and depending on who you ask will say that was a monopoly Example: Let’s take it back to 1880. AT&T was created and going all the way towards 1918 which was 101 years ago. AT&T service was mostly used AT&T had received a government-sanctioned monopoly for being the sole provider of phone service throughout most of the United States. Now while it didn’t cover it all which makes it fall short from being truly being a monopoly. It would just be considered a legal monopoly. In terms of the United States Department of Justice a monopoly is when one firm merely has a very high market share. Since monopolies and perfect competitions don’t really exist, is there are monopolistic competitions and oligopoly that do exist quite a lot actually. Monopolistic competitions are when many firms compete with each other, selling products in some distinctive way. For example, toothpaste brands such Crest, Colgate, Sensodyne, Arm Hammer, Aim to name a few. Since there is a large variety of him, each firm has their own mini-monoply due to brand name, style, and in this case flavor. Oligopoly is when a small number of large firms have ALL or most of the sales in an industry. For example, cell phone providers. While there are small cell phone providers like boost, simple mobile, cricket, virgin mobile to name a few. However the small number of providers that dominate are Verizon, Sprint, AT&T, and T-Mobile. Similarities & Differences between Perfect Competition and Monopoly are when: Similarities being: Both face the same cost and production function and seek to maximize profit. It’s also interesting to note, that in a monopolistic competition and perfect competition there is firms compete with each other. Differences being: Perfect Competitions has homogeneous goods; Monopoly is the only producer of that good. Perfect Competition haves’ large number of buyer and seller, Monopolies has only one seller. Perfect Competition has a price competition while Monopolies have no competition to worry about. Perfect Competition are price takers, Monopolies are price makers. Perfect Competition has no barriers to enter or exit while Monopolies are high barriers entries. Perfect Competition has zero market power while Monopolies haves some sort of market power. In terms of a preference, that entirely depends on you. From a consumer perspective I would love the perfect competition because it’s many different options at my disposal to choose for a good I would want and more than likely to get a good at a lower price. However, if I’m the producer I would prefer to be in a monopoly because I’m the only one with that good and on top of that there’s no substitutes to exist so people would have to buy from me if they want that good.

[MUSIC]

MICHAEL: There you have a folks on another edition of Oz-onomics, where economics becomes easier for Oswego students to understand where you get your money that you pay for your tuition worth. If you feel like being ahead of the curve, grab a seat, grab your phone, shift your fingers left and right. And download Oz-onomics on the podcast app. See you later.

The introduction to this podcast was provided by Kate Soanes and Gabriella Schaff. Michael Kolawale provided the outro. Music by Lobo Loco.