Comparing competitive structure models: perfect competition, monopoly, and oligopoly

¶ … Economics Business' (Micro Economics) required write assignment response question: Compare contrast ' forces' analysis competitive structure S-C-P (Structure Conduct Performance) models perfect competition, monopoly oligopoly.

Five Forces vs. SCP model

The SCP model of market development suggests that there are three basic market structures which exist, that of perfect competition, monopoly and oligopoly. In a model of perfect competition, consumers are extremely powerful. "Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand" (Monopolies, oligopolies, and perfect competition, 2012, Investopedia). It is very easy for new firms to enter the marketplace, and very easy for consumers to shift their purchasing power to other entities that offer them a better deal. There is little advantage to operating on an economy of scale.

In contrast, in a monopoly, only one firm controls the market. There are extremely high barriers to entry and few substitutes. Consumers and suppliers have little power. Government regulation may prohibit some monopolies and allow others under highly controlled circumstances. "For instance, a government can create a monopoly over an industry that it wants to control, such as electricity" (Monopolies, oligopolies, and perfect competition, 2012, Investopedia). In an oligopoly, the market is dominated by only a few firms with great power due to high barriers to entry and little consumer choice. In both monopolistic and oligopolistic competition, consumers generally pay a higher price than the market equilibrium would otherwise suggest, in the absence of meaningful competition.

Porter's Five Forces analysis likewise takes into consideration such factors as the buying power of consumers; available substitutes; barriers to entry and the competitive rivalry amongst sellers (which is very great in a state of perfect competition, nonexistent in a state of monopolistic competition, and limited in an oligopoly where collusion and price-setting may take place). It also takes into consideration the buying power of suppliers. Porter's approach is more structured and more nuanced than the SCP model. For example, available substitutes and the purchasing power of consumers are considered separately, rather than together. A consumer may have many substitutes for a fast food burger, in the form of other types of foods that he or she can consume. However, consumers may have little power because of few available burger outlets in the area, if they want a fast food burger.

Porter views the degree of competition within a particular marketplace along a continuum, rather than as either one of three 'choices.' His model also allows for more fluidity in terms of market structure. In the SCP model, once a market takes on a particular type of competitive structure, it is generally analyzed as an unchanging entity in the absence of radical environmental changes, such as the government's dissolution of the monopoly. But small shifts in various aspects of the five forces can subtly make a market more perfectly competitive or more like an oligopoly.