Price determination and equilibrium of a firm in different market situations are influenced by the level of competition and the firm’s market power.
In a perfectly competitive market, there are many buyers and sellers, and each firm produces an identical product. Price determination is entirely determined by market forces of supply and demand. Individual firms in a perfectly competitive market are price takers, meaning they have no influence on the market price. The equilibrium price is where the market demand curve intersects with the market supply curve, representing the price at which the quantity demanded equals the quantity supplied.
In a monopoly market, there is only one seller, and they have significant market power. The monopolist determines the price based on their production level and the price-demand relationship. The monopolist faces the entire market demand curve and can choose any price-quantity combination that maximizes their profit. The equilibrium price in a monopoly is where the firm’s marginal cost (MC) equals the marginal revenue (MR).
In an oligopoly market, there are a few dominant sellers, and each firm has some degree of market power. The pricing decisions of one firm can have a significant impact on other firms in the industry. Oligopolistic firms engage in strategic pricing behavior, taking into account the reactions of their competitors. The equilibrium price in an oligopoly depends on the firms’ pricing strategies and how they interact in the market.
In monopolistic competition, there are many firms selling differentiated products, meaning they have some market power. Each firm faces a downward-sloping demand curve for its unique product. The equilibrium price and output level are determined where the firm’s marginal cost equals its marginal revenue. However, the price is typically higher than in perfect competition due to product differentiation.
In a monopsony market, there is only one buyer, and many sellers compete to sell their products to this single buyer. The monopsonist has significant market power as the sole buyer, and it can influence the price of the goods or services it purchases. The monopsonist’s demand curve is downward sloping, indicating that it can only buy more units of a good by offering a lower price. The equilibrium price in a monopsony is where the monopsonist’s marginal cost of purchasing equals its marginal revenue product.
A duopoly market consists of two firms dominating the industry. These firms may compete or collude with each other to set prices. In a competitive duopoly, each firm acts independently, and the equilibrium price is determined based on their individual pricing decisions. In a collusive duopoly, the firms may coordinate their pricing to achieve higher profits collectively.
A natural monopoly occurs when it is more efficient for a single firm to serve the entire market due to economies of scale. In a natural monopoly, one firm can supply the entire market at a lower cost than multiple firms. The equilibrium price in a natural monopoly is typically set by regulatory authorities to prevent the monopolist from charging excessive prices.
In Stackelberg duopoly, one firm is the leader, and the other is the follower. The leader sets its price first, considering the follower’s reaction. The follower then observes the leader’s price and sets its price accordingly. The equilibrium price and output are determined based on the leader’s pricing strategy and the follower’s response.
In Bertrand duopoly, two firms compete on price, assuming they have identical products. Both firms simultaneously set their prices, and consumers will buy from the firm with the lower price. The equilibrium price is achieved when both firms set their prices equal to their marginal cost, resulting in zero economic profits.
In Cournot duopoly, two firms compete on quantity. Each firm decides how much to produce, assuming the other firm’s output remains constant. The equilibrium quantity and price are determined based on the firms’ production decisions and the market demand.