Types of Competition in Free Market System

There are four types of competition in a free market system: perfect competition, monopolistic competition, oligopoly, and monopoly.

Under monopolistic competition, many sellers offer differentiated products—products that differ slightly but serve similar purposes. By making consumers aware of product differences, sellers exert some control over price.

Monopoly is the economics control of market supply, a situation in which one company controls an industry or is the only provider of a product or service. In the field of commerce, monopoly is business corporation with exclusive control, a company with a commercial monopoly. Monopoly is thriving when there is no practical substitutes for the product or service sold, and no serious threat of the entry of a competitor into the market. This enables the seller to control the price.

In a monopoly, there is only one seller in the market. The market could be a geographical area, such as a city or a regional area, and does not necessarily have to be an entire country. The single seller is able to control prices.

Trust (monopoly) is the corporate monopoly organized under the legal device of trusteeship for the purpose of eliminating competition in an area of business and of controlling the market for a product.

Oligopoly is an economic condition in which there are so few suppliers of a particular product that one supplier’s actions can have a significant impact on prices and on its competitors. In an oligopoly, a few sellers supply a sizable portion of products in the market. They exert some control over price, but because their products are similar, when one company lowers prices, the others follow.

Duopoly is an economic situation in which two powerful groups or organizations concentrate or dominate commerce in one business market or commodity

Most monopolies fall into one of two categories: natural and legal.

Natural Monopoloy: The control of market suply on publict utilities such as electricity, gas, water, telephone. Economies of scale make it inefficient to have even two companies distributing electricity, gas, water, or local telephone service to consumers. It would be very expensive to have even two sets of electric and telephone wires, and two sets of water, gas, and sewer pipes going to every house. That is why firms that provide these services are called natural monopolies.

Governments generally regulate “natural monopolies” of public utilities such as water and electric distribution because these industries require such a large investment that it would not be profitable to have more than one provider. Regulation is used in place of competition to prevent these monopolies from making excessive profits. Natural monopoly inhibit competition, but they’re legal because they’re important to society.

A legal monopoly arises when a company receives a patent giving it exclusive use of an invented product or process for a limited time, generally twenty years.

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