Question

Give an example comparing a perfect competition and a monopoly. Choose a company and discuss the market structure in which you think it operates. Give reasons for your answer.

Answer 1

Answer:

Perfect competition markets are only theoretical, they do not exist in reality, but some markets resemble them very closely, e.g. agricultural commodities:

• thousands of farms that produce corn:
• the product is uniform (it is corn),
• there are several buyers (although not enough as they should be),
• information is not perfect, but it is available,
• and finally, entry barriers exist (farmland is expensive), but a lot of potential investors could overcome them

Generally, the price of agricultural commodities is based on the price set by the Chicago Mercantile Exchange on a daily basis. If one farmer doesn't want to sell their products to Cargill, they can sell them to ADM or some other buyer (even local buyers exist). No producer is large enough to set a price, therefore, they are all price takers. On the other hand, some buyers are large enough to influence the price.

On the other hand, we have any local utilities company that has a monopoly on providing water. If you do not like the utilities company, then unless you have a tanker truck, you are stuck with that company. Monopolies can set the price of their products or services, and that is why most natural monopolies are either government owned or their price is set by the government. As a consumer, your bargaining power against a monopoly is basically nonexistent, maybe if you are part of some type of consumer association you can reach the company, but generally not.