Market Structures

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Market Structures

Perfect Competition

Under conditions of perfect competition, producers have no market power. They cannot influence prices because there are too many other producers offering the same product. Instead, the market forces of supply and deand determine the price of goods. Producers are said to be price takers because they must accept, or take, the market price for their product.

In a perfectly competitive market, producers face few restrictions in entering the market. Ease of entry ensures that existing producers will face competition from new firms and that a single producer will not dominate the market.

Subtopic

Products in perfectly competitive markets are virtually identical. As a result, consumers do not distinguish among the products of different producers. A product that is exactly the same no matter who produces it is called a commodity.

Identical

Perfectly competitive markets have many producers and consumers. Having a large number of participants in a market helps promote competition.

LOTS

Monopoly

Monopolistic firms usually have great market power because they control the supply of a good or service. They can set a price for a product without fear of being undercut by competitors. Unlike competitive firms, monopolistic businesses are price setters rather than price takers.

Substantial control over prices

The main factor that allows monopolies to exist is high barriers to entry that limit or prevent other producers from entering the market.

High barriers to entry

A monopoly provides the only product of its kind. There are no good substitutes, and no other producers provide similar goods or services.

Unique Product

There is no competition in a monopoly. A single producer or firm controls the industry or market. An economist might say that the monopolistic firm is the industry.

One Producer

Monopolistic Competition

Because producers control their brands, they also have some control over prices. However, because products from different producers are close substitutes, this market power is limited. If prices rise too much, customers may shift to another brand. In addition, there are too many producers for price leadership or collusion to be feasible.

Some coupons

Start-up cost are relatively low in monopolistically competitive markets. This allows many firms to enter the market and earn a profit.

Kind of

Firms in this type of market engage in product differentiation, which means they seek to distinguish their goods and services from those of other firms, even when those products are fairly close substitutes for one another.

Yes with some differences

Monopolistically competitive markets have many producers or sellers. In a big city, many restaurants compete with one another for business. The same is true for gas stations and hotels.

Yes

Oligopoly

Control over prices

Because there are few firms in an oligopoly, they may be able to exert some control over prices. Firms in an oligopoly are often influenced by the price decisions of other firms in the market. This interdependence between firms in setting prices is a key feature of oligopoly.

Ease of entry

It is hard for new firms to break into an oligopoly and compete with existing businesses. One reason may be high start-up costs. Existing firms may already have made sizable investments and enjoy the advantage of economies of scale.

Hard/Collusion

Similarity of products

Producers in oligopolies offer essentially the same product, with only minor variations.

Some

Number of producers

In an oligopoly, a small number of firms control the market. In general, an industry is considered an oligopoly if the four top producers together supply more than about 60 percent of total output. The proportion of the total market controlled by a set number of companies is called the concentration ratio.

Not a lot/60%

Market Failures

Negative Externality

A cost that falls on someone other than the producer or consumer.

Positive Externality

A benefit that falls on someone other than the the producer or consumer.