Answers to Questions
The differences between the four types of market structures
Perfect competition defines a market structure with a large number of small corporations compete against each other. Thus, a single enterprise does not enjoy any significant market power. Consequently, the industry produces an optimal level of output since none of the firms can influence market prices.
Moreover, goods sold in perfect competition market are usually homogenous and can be substituted at no cost. On the other hand, describes a situation where many sellers and producers exist and sell different goods and services. Customers my develop preferences to some sellers due to differentiated goods. Therefore, they may be willing to spend more money buying goods from specific sellers. Subsequently, sellers may exercise a certain degree of market power and decide to charge a price premium. Thus, they can directly affect the market price to a certain degree.
A monopoly is a market structure where a single firm controls the whole market. As a result, the firm gets the highest level of market power since consumers do not have alternatives. Therefore, monopolists usually minimize output to increase prices and earn more revenue. Also, in monopoly close competitors for the product do not exist. Monopoly market structure is also characterized with significant barriers to entry. Monopoly firms experience a downward sloping demand curve meaning more goods can be sold at lower prices and vice versa.
Conversely, oligopoly is a market structure that is dominated by a small number of firms which results in a state of limited competition. Interdependence of various firms in decision making is the main characteristic of oligopoly. Furthermore, barriers to entry or exit from oligopoly market structure do not exist. The products in this market structure may be homogenous or differentiated.
the concepts of strategic rivalry, game theory, and prisoner’s dilemma
Strategic rivalry can be used to encourage two interdependent players to work with each other. Each firm should develop optimal strategies basing on an understanding of what the rival is planning to do. Thus, one firm should depend upon the likely strategy of the rival. For instance, if the rival is aggressive, the other firm should also be aggressive, and this will lead to increased profits.
Game theory is used in predicting the results of games of strategy where participants have incomplete information about their rival’s intentions. Instead of two firms engaging in a price war and compete against each other, they can decide to cooperate with each other. Two interdependent players can be encouraged to act and behave in in a way that ignores the possible responses that other firms might make to their actions. The two firms should not consider the existence of interdependence, and they should ignore it and assume that whatever they do will not provoke responses from rivals. This type of behavior is usually termed as ‘naïve’ and often encourages interdependent players to work together.
According to the prisoner’s dilemma, two criminals arrested by police who is trying to offer each of them a deal. The police promise them to provide evidence against each other, then they will be set free. On the other hand, the dilemma between the two interdependent firms is the dominant strategy each of them possesses. Both are better if they choose not to play their dominant strategies. This strategy will minimize rivalry between the two players and encourage cooperation between them. Also, the Nash Equilibrium is a vital idea in game theory as it describes the condition where the participants in a game are chasing their best possible strategy basing on the strategies of their rivals.