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

(Answers may vary.)

Under perfect competition, businesses do not differentiate their products or services—they are homogenous, and the seller has no influence on the prices. The company sells as much as possible to satisfy market demand. Perfect information exists in perfect competition. That is, consumers know all the information about the products or services at every stage in the selling process.

In contrast, a monopoly market completely depends on the monopolist, who gets to set the price of the product. As the price maker, the monopolist is the only seller.

Here’s an example that illustrates how the two markets work. Sugar is sourced directly from the producer as an unbranded commodity. Everyone knows the price of sugar; there is no scope for negotiation, and the seller has no direct influence over the price of the product. If a business uses this product as the primary and only raw material to produce an innovative product, such as a new dessert product that no one else can produce, then that company becomes a monopoly. The company is in a position to set the price of the final product at its own discretion. Therefore, the nature of a product or service that a company offers determines the type of market structure in which it operates.

Telmex is a good example of a monopoly. It is the dominant telecommunications provider in Mexico, with a market share of over 80 percent (as of 2014). There is no scope for competition, unless the government or another agent forces Telmex to offer competitive pricing to other carriers who use Telmex’s network, as well as to Telmex customers who want to port to another carrier. Telmex also monopolizes other areas by cross-subsidizing its allied services such as IPTV, data hosting, and Internet access.

In 1972, the Mexican government bought the privately owned Telmex and turned it into a government monopoly. In 1991, the Mexican government sold all its stock, turning Telmex back into a private enterprise. Today, Telmex is a quasi-monopoly. There are other service providers in Mexico, such as Axtel, Megacable, Cablecom, Maxcom, and Alestra, but Telmex still enjoys the largest market share.

Explanation:PLATO

Answer 2

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.