eBay- Perfect Competition

eBay- Perfect Competition

In economics, there exist different types of competition in the market depending on the sector and the structure of companies. Market competition can be categorized into four; perfect, monopolistic, oligopoly, and monopoly competitions (Zeder, 2020). Perfect competition defines a structure where the businesses in the market continuously compete against each other, creating an elastic situation that prohibits a single firm from dictating the prices of products. The features of perfect competition follow the following assumptions; all corporations capitalize on profits, sellers and buyers can enter and leave the market as they wish, all firms sell similar products, and consumers don’t have tastes and preferences (Zeder, 2020).

Monopolistic competition, on the other hand, has the same characteristics except that the products in this market are slightly differentiated; customers have a range of commodities to choose from one another. An oligopoly structure represents a situation where there are only a few firms are present in the market. The companies can either compete or cooperate, making them decide on prices that would make them maximum profits. Lastly, the monopoly structure describes where a market only one firm. This kimarket has no alternatives for the main company as there are numerous barriers to entry and exit (Zeder, 2020).

That said, outlined in the next section are the advantages of perfect competition markets. First, the market prohibits the exploitation of the consumer by providing a platform of high competition that ensures firms don’t charge high prices for products. Secondly, in this market products are homogenous meaning they are standardized, lastly, the fierce competition in this market increases customer satisfaction as they have the liberty of shifting from one seller to the other if one has substandard merchandises. Examples of industries that belong to this kind of market are; foreign exchange markets, agricultural markets and internet related industries (Pettinger, 2020). eBay falls in this type of market because it is characterized by having many buyers and sellers, buyers and sellers are adequately informed about the products, and there is freedom of entry and exit.

The diagram below illustrates the effect short run and long run profit in the market: Source: https://www.economicshelp.org/microessays/markets/perfect-competition/

In the short-run the market experiences price equilibrium that means firms are making supernormal profits this prompts entry of many firms that shifts prices downwards. The effect of this in the long-run would lead to companies making losses making more businesses leave the market. From the above diagram, this phenomenon would imply that the AC curve will increase, hence, AR<AC, and since firms will be exiting, supply will decrease resulting in prices shooting up. This market is practically productive vs allocative efficient, where, firms will be productively efficient when the average cost curve is on the lowest point and allocatively efficient when the price is equal to the marginal cost in the market.