A market operates under perfect competition if it satisfies the following conditions:
1. Numerous firms
2. Freedom of entry and exit
3. Homogeneous output
4. Perfect information
In a market economy, competition occurs between large numbers of buyers and sellers who vie for the opportunity to buy or sell goods and services. The competition among buyers means that prices will never fall very low, and the competition among sellers means that prices will never rise very high. This is only true if there are so many buyers and sellers that none of them has a significant impact on the market equilibrium.
Pure monopoly - A firm that satisfies the following conditions:
1. It is the only supplier in the market.
2. There is no close substitute to the output good.
3. There is no threat of competition.
Natural monopoly - A firm with such extreme economies of scale that once it begins creating a certain level of output, it can produce more at a lower cost than any smaller competitor. Generally characterized by a declining average cost curve.
Duopoly - A market dominated by two firms. Both firms are large enough to influence the market price.
Oligopoly - A market dominated by a small number of firms. At least several of these firms are large enough to influence the market price.
A monopoly differs from competitive firms in that it is not a price taker. Because it is the only supplier in the market, it faces a downward sloping demand curve, the market demand curve. As a result, the monopoly is free to choose its price and quantity according to market demand. Monopolies are still profit maximizing firms and are thus going to satisfy the profit maximizing condition that marginal cost equal marginal revenue. The key to understanding monopolies and monopoly power is the marginal revenue calculation. In a perfectly competitive market, there exists a market price. Marginal revenue is simply equal to price in this market; every additional unit that is sold brings the market price. In a monopoly, however, every quantity is associated with a different price.
In IndustryMasters the 3 main conditions (Freedom of entry and exit, Homogeneous output, Perfect information) of perfect competition are given. The number of competing firms depends on the participants investment decisions. All competition patterns, as Monopoly, Duopoly and Oligopoly may occur in IndustryMasters. In any case the Equilibrium Price is determined by the aggregate demand to aggregate Supply functions for each Industry.