U3 M57

Market Structures

Types of Market Structures

  • Every product sold in a market falls under one of four structures:

    • Perfect Competition

    • Monopoly

    • Monopolistic Competition

    • Oligopoly

4 Types of Competition
Determining Market Structure

  • Influenced by:

    1. Number of firms in the market

    2. Firms' control over price

    3. Types of goods produced

    4. Barriers to entry

Examples of Market Structures

  • Monopolistic Competition: Fast Food Market

  • Oligopoly: Car Manufacturers, Market for Operating Systems (e.g., Microsoft)

  • Perfect Competition: Strawberry Market

  • Monopoly: Electricity Market

Characteristics of Market Structures

Perfect Competition

  • Many small firms

  • Identical products (perfect substitutes)

  • Low barriers to entry

  • No advertising necessary

    • no need to advertise to show what or how a product works

  • "Price Takers" - no control over price

    • seller doesn’t really have control over the price, determined by supply or demand

      • if a seller strays away from equilibrium → lose profits

  • Examples: Corn, strawberries, milk

Monopoly

  • One dominant firm in the market

  • Unique product (no close substitutes)

  • High barriers to entry preventing new firms

  • "Price Makers" with control over prices

    • have to worry about what people want to pay for good/service (i.e. NJ Transit service) → price must be limited so that the people will still actually buy it

  • Examples: Electric Company, De Beers

Barriers to Entry in Monopoly

  1. Economies of Scale: Natural monopolies can produce at lower costs.

    • Ex. There is only one electric company because they are the only ones that can produce electricity at the lowest cost This is “natural monopoly”

  2. Superior Technology

  3. Geography/Ownership of Raw Materials

    • Ex. De Beers (diamonds)

  4. Government-created Barriers: Patents and regulations

Oligopoly

  • Few large producers (typically less than 10)

  • Identical or differentiated products

  • High barriers to entry

    • Reasons:

      • High Capital Requirements: The investment needed to enter the market can be substantial, which deters new firms.

      • Economies of Scale: Established firms often operate at a larger scale, making it difficult for new entrants to compete on cost.

      • Brand Loyalty: Existing companies may have strong brand loyalty, making it challenging for new firms to attract customers.

      • Control of Resources: Existing firms may control key resources or suppliers, blocking new competitors from accessing necessary inputs.

      • Government Regulation: Some oligopolies are protected by regulations or tariffs that make entry difficult for outsiders.

  • Control over prices ("Price Makers")

    • more control over price than in perfect competition

  • Mutual interdependence among firms (companies have to watch things like prices + other products that other companies are making)

    • Examples: Oil, ISPs, automobiles

Monopolistic Competition

  • Relatively Large number of sellers

  • Differentiated products allowing for some price control

  • Low barriers to entry

  • Significant non-price competition, relying on heavy advertising (quality + variety)

    • Examples: Fast food, furniture, footwear stores