ECON Market Structures

4 market structures (most → least competitive)

Perfect competition → Monopolistic competition → Oligopoly → Monopoly

Most competitive market structure

Perfect competition

Least competitive market structure

Monopoly

Perfect competition – number of firms

Many small firms

Perfect competition – type of product

Identical (standardized)

Perfect competition – how firms set price

Price takers (accept the market price)

Perfect competition – barriers to entry

None

Monopolistic competition – number of firms

Many (dozens of) firms, often local

Monopolistic competition – type of product

Differentiated

Monopolistic competition – how firms set price

Price makers (some control over price)

Monopolistic competition – barriers to entry

Small / low

Oligopoly – number of firms

A few large firms (four-firm rule)

Oligopoly – type of product

Similar ("same ballpark") – can be identical or differentiated

Oligopoly – how firms set price

Interdependent – each firm's pricing depends on what rivals do

Oligopoly – barriers to entry

Large / high

Monopoly – number of firms

One

Monopoly – type of product

Unique (no close substitutes)

Monopoly – how firms set price

Price maker with market power

Monopoly – barriers to entry

Massive

Four-firm rule

If the 4 largest firms (or fewer) control 50% or more of the market, it's an oligopoly

Example of an oligopoly

Cell phone carriers: T-Mobile, AT&T and Verizon control over 50% of the market

Price taker

A firm that must accept the market price (perfect competition)

Price maker

A firm that can set its own price (monopolistic competition, monopoly)

Interdependent pricing

Firms base their prices on competitors' decisions (oligopoly)

Profit-maximizing rule

Produce the quantity where MC = MR (marginal cost = marginal revenue)

MC

Marginal cost – the added cost of producing one more unit

MR

Marginal revenue – the added revenue from selling one more unit

Identical products → which structure?

Perfect competition

Differentiated products + many firms + low barriers → which structure?

Monopolistic competition

Few firms + high barriers + interdependent pricing → which structure?

Oligopoly

One firm + unique product + massive barriers → which structure?

Monopoly