Perfect Competition

In perfect competition, the demand is constant because producers are price takers, rather than price setters.  Firms can only receive normal profits out of their transaction and there is the products from all firms are indifferent (ex: wheat).  The market is made out of large amount of firms, and a firm entering or exiting the market will not affect the price or demands.  There are minimal to no movements in short run.

Monopolistic Competition

The graph illustrated above represents a long run monopolistic competition market.  In a short run, it is possible for firms to earn economic profits.  For example, the lone gas station in the middle of nowhere will earn economic profit, but in a long run monopolistic competition market, only normal profits can be made.  The demand slope is always in a downward sloping, and where the average cost and average revenue meets is the break even points.  Entry into the monopolistic competition market is easy and almost unrestricted.  Examples are restaurants and retail stores.

Oligopoly

Oligopoly is dominated by a few large firms.  It is extremely difficult to enter into the market and the firms have significant control over its price, hence there are chances for price war and price competition.  The kinked demand curve shows how the demand can change from elastic and inelastic as a direct effect of the marginal revenue.  As illustrated in the game theory, nonprice competition and price agreements are often found in this type of market, even though it is a practices deemed as illegal in many countries.

Monopoly

The last graph is a monopoly.  There are no competition, and near impossible for new firms to enter into the market, therefore, monopoly is always making economic profits.  As illustrated in the text book, increasing the supply will not affect the demand, but it will only cause monopoly firms to lower their price to avoid a surplus.  The maximum profit is where the marginal revenue meets the marginal cost.  As listed in the table above, Government are not on side with the monopoly market, and tries to control using the price setting method, taxing, and nationalization.

The Game Theory

The game theory is defined as a method of analyzing firm behavior that highlights mutual interdependence among firms.  In an easier way as explained on Wikipedia, it is "the study of mathematical models of conflict and cooperation between intelligent rational decision-makers”.  Game theory was developed by economists John Neumann and Oskar Morgenstern in the 1940s to analyse strategic behavior.  The game theory is developed base on a firm’s greed, how they cheat strategically to gain more market shares and earn revenue for their own organization. 

Although collusion is illegal in our society, game theory exists in today’s world.  Some of the most obvious examples are in the food industry.  Think of two coffee shops opening right across the street from each other, competition is inevitable for the two shops to survive.  When coffee shop A sells coffee for $2, coffee shop B will also try to match their price to stay in competition.  Once the market share has been split between the two shops, one of the firm will eventually become greedy, and try to lower their price by a slight margin to attract more customer and obtain more market shares.  Eventually, this may or may not start a price war between the two shops, depending on both firm’s reaction to the price change and competition.  This is where a payoff matrix comes in.

A payoff matrix calculates what happen in different scenarios.  In the example above, four different scenarios are identify, and it shows what happens when Yellow and white keep their pricing balanced, then what happened when one of the firms cheat, and what happened when they both cheat and lower their product’s price.  It is clear that the best scenario for both firms is when they keep a balanced price level, maximizing their revenue by selling maximized quantity, splitting the market share evenly.  However, in the right bottom corner, when both firms cheat, they both lose.  In the real world, a perfect scenario rarely exist, and firms plan and act strategically to maximize their profit, and the best strategy will win the most revenue and market shares within the field.  There are a few ways companies can make agreement to ensure they work with each other, while competing against each other, to maximize their profits.  They are collusive and cartel actions.  Collusive and cartel actions are similar.  Collusive is when firms unofficially split the market share, limiting their production and setting a price level at the highest possible price to maximized jointed profits.  Cartel action is similar, but it is a formal agreement of cooperation between competitors, and they are usually divided up between regions, demographics, an existing client list or a quota.  

Monopolistic Competitive Companies

Monopolistic Competitions are usually smaller firms in retailing, and services that caters directly to the customers.  For example, travelling agencies, hairdressers, clothing stores, gas stations... etc. would be considered a monopolistic competitor.

Characteristics of monopolistic competitions would include; freedom of entry into the market, has minor control over their price, and usually sells differentiated products.  Entry and exit of a monopolistic store will usually not affect the economy, as monopolistic competition rarely gain from economic profits.  There are, however, rare cases of monopolistic competition that can gain from economic profits, those exception are usually due to an excellent location of the business, or exceptional services.

Size:	Small Company	Medium Company	Large Company
Features:	Neighbourhood store – Shangri-La Home Decor	Canadian Furniture Store - The Brick	World Wide furniture store - IKEA
Differentiated products	Home Furniture, Unique home decor from Asia	Normal home furniture and electronics, Luxury with multiple locations	Furniture, signature designs, logo, signature locations, well known cafe, signature easy assembly.
Control over price	Some	Some	Some
Mass advertising	Internet and Word of mouth	Weekly Flyer, Internet, TV and radio ads,	Weekly Flyer, Signature Wacky Wednesday, Media, awards, annual catalogue
Brand name goods	None	Minimal	Tons
Freedom of Entry	Very easy	Tough	Nearly impossible without foundation