What market form are there?

The market form exists in all circumstances under which companies compete with each other. In one market there are many suppliers, in the other there are very few. The market form is explained in the story. The following components will be explained: perfect competition, monopoly, oligopoly and monopolistic competition.

Complete competition

Perfect competition is a market form where there are many buyers and suppliers. In this market form, the price is already determined by collective demand and collective supply. A single buyer or supplier cannot change the market price. The price is determined by supply and demand. The stock exchange and the currency market are an example of this. One buyer or supplier in the foreign exchange market cannot change the exchange rate. The exchange rate changes if many people suddenly ask a lot for a currency or if they offer a certain currency a lot. It is important to know that the goods or services are homogeneous.

Monopoly

In this market form there are many buyers and only one supplier. The product or service that is offered does not suffer from competition. The price is usually a bit high. What is being said here is called a pure monopoly. This does not or rarely occur in practice. The Dutch Railways has a monopoly on passenger transport by rail. The Dutch Railways does not have a monopoly in general transport because travelers can use, for example, a car, a motorcycle or an airplane. Microsoft is also a monopoly, just not a pure monopoly. Almost all computers in the world are controlled by Microsoft Windows. Microsoft’s competitors are Apple and Linux. Despite this, Microsoft has a monopoly because almost all computers are controlled by this system. Do you want to purchase an Office package? Then you will have to pay a lot for it. This is because you have no choice from other providers.

Oligopoly

An oligopoly has many demanders and few suppliers. The gasoline market is an example of an oligopoly. What is striking in an oligopoly is that the companies more or less leave each other alone. There is no fierce competition. If Shell lowers its prices, BP will do so too. BP will probably be just below Shell’s price. This creates a downward price spiral. This is bad for both companies, so they more or less leave each other alone. Instead of competing, cartels are forming between the large companies in the market. Cartel formation means that two or more companies make price agreements. This creates a kind of large company. If Shell, BP and Q8 make price agreements, they are like a monopoly. The price will then be higher than if they were to compete. The Dutch Competition Authority (NMa) fines companies that engage in cartel formation.

Homogeneous & heterogeneous oligopoly

In a homogeneous oligopoly, the products or services are identical. The consumer sees no difference. If one provider lowers its prices, the rest must go along to avoid losing customers. Heterogeneous oligopoly is the fuel market. Esso and Shell have the same fuel. It doesn’t matter where you go to refuel. But it is still a heterogeneous oligopoly, this is due to offers, for example. For example, if Shell holds a promotion where you can collect stamps, they distinguish themselves from their competitors. Many will fill up at Shell because they are saving for something.

Monopolistic competition

This market form is somewhere between a monopoly and perfect competition. You could also compare it with perfect competition, but with a heterogeneous good or service. Marketing and advertising are important in this market form. The consumer can choose from different providers. The market for televisions is monopolistically competitive. There are many brands offering televisions, but only a few are well known. In most cases, a consumer buys a brand that he has already owned or already knows. If a consumer is satisfied with a Philips television, he will also buy a Philips next time. The producer has something special that the competitor does not have, which keeps the customer base loyal. Coca Cola is more expensive than any other cola. But they are still the market leader, this is because Coca Cola has a secret recipe. It has a different taste than the others.