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Market Structures

Perfectly Competitive Market

Basic Assumptions:
1. Price taker
2. Product homogeneity
3. Free entry and exit
Price taker
The individual firm sells a very small share of the total
market output and therefore, cannot influence market
Each firm takes market price as given price taker
The individual consumer buys too small a share of
industry output to have any impact on market price.
Product Homogeneity

The products of all firms are perfect

Product quality is relatively similar as well
as other product characteristics.
Free Entry and Exit
There are no special costs that make it difficult
for a firm to enter and exit an industry.
Buyers can easily switch from one supplier to
Supplier can easily enter or exit a market.

Pure monopoly exists when a single firm is

the sole producer of a product for which
there are no close substitutes.
Characteristics of Pure Monopoly
SINGLE SELLER. A pure, or absolute monopoly is an
industry in which a single firm is the sole producer of
a specific good or the sole supplier of a service.
NO CLOSE SUBSTITUES. A pure monopolys product is
PRICE MAKER. The pure monopolist controls the total
quantity supplied and thus has considerable control
over price.
Characteristics of Pure Monopoly
BLOCKED ENTRY. A pure monopolist has no immediate
competitors because certain barriers keep potential
competitors from entering the industry. Those barriers may
be economic, technological, legal, or of some other type.
NONPRICE COMPETITION. The products produced by a pure
monopolists may either be standardized (as with natural gas
and electricity) or differentiated (as with Windows).
Examples of Monopoly

Government-owned or government-
regulated public utilities natural gas and
electric companies, water company, cable
TV company and local telephone.
Barriers to Entry
1. Economies of Scale
2. Legal barriers to entry: Patents and Licenses
3. Ownership or Control of Essential Resources
4. Pricing and other strategic barriers to entry
Barriers to Entry
ECONOMIES OF SCALE. The cost advantages that enterprises obtain
due to size, output, or scale of operation, with cost per unit of output
generally decreasing with increasing scale as fixed costs are spread
out over more units of output.
PATENTS. The exclusive right of an inventor to use, or to allow
another to use, her or his invention. Patents and patents law aim to
protect the inventors from rivals who would use the invention
without having shared in the effort and expense of developing it. It
provides the inventors with a monopoly position for the life of the
patent. The worlds nations have agreed on a uniform patent length
of 20 years from the time of application.
Barriers to Entry
LICENSES. Government may also limit entry into an industry
or occupation through licensing.
monopolist can use private property as an obstacle to
potential rivals.
monopolist, when confronted with a new entrant, may
create an entry barrier by slashing its prices, stepping up its
advertising or taking other actions to make it difficult for the
entrant to succeed.
Monopolistic Competition
Similar to a perfectly competitive market there are many firms and
entry by new firms is not restricted.
It differs from perfect competition product is differentiated.
Each firm sells a brand or version of the product that differs in quality,
appearance or reputation and each firm is the sole producer of its own
The amount of monopoly power wielded by a firm depends on its
success in differentiating its product from those other firms.
Toothpaste, laundry detergent, packaged coffee
Monopolistic Competition
1. Many producers and consumers in the market, and
no business has total control over market price.
2. Consumers perceives that there are non-price
differences among the competitors products.
3. There are few barriers to entry and exit.
4. Producers have a degree of control over price.
Differentiated Products
Aspects of differentiated products:
1. Product Attributes may entail physical or qualitative differences.
2. Service
3. Location accessibility of the stores that sell the products.
4. Brand names and packaging product differentiation may also be
created through the use of brand names and trademarks,
packaging, and celebrity connections.
5. Control over price.
Only few firms compete with one another and entry by new
firms is impeded.
Product that the firms produced might be differentiated
Automobile, steel, aluminum, computers, electrical
Monopoly power and profitability depend on how the firms
Firms may cooperate or compete aggressively
Characteristics of Oligopoly
1. Profit maximizing conditions. An oligopoly
maximizes profits.
2. Ability to set prices
3. Entry and exit. Barriers to entry are high.
4. Few numbers of sellers
Characteristics of Oligopoly
5. Product differentiation
6. Perfect knowledge of their own cost and demand functions
7. Interdependence. Oligopolies are typically composed of few large
firms and each firm is so large that its action affect market
8. Non-price Competition. Oligopolies tend to compete on terms
other than price loyalty schemes, advertisement and product
Some barriers to entry in a market:
Patents or access to technology
The need to spend money for name recognition and market reputation

Managing an oligopolistic competition firm is complicated because

pricing, output, advertising and investment decisions involve important
strategic considerations. These strategic considerations can be
complex. When making decisions, each firm must weigh its
competitors reactions knowing that these competitors will also weigh
its reactions to their decisions.
The Prisoners Dilemma
Game theory example in which two prisoners must
decide separately whether to confess to a crime; if a
prisoner confesses, he will receive a lighter sentence
and his accomplice will receive a heavier one, but if
neither confesses, sentences will be lighter than if
both confesses.
Payoff Matrix for Prisoners Dilemma

Payoff matrix table

showing (or payoff)
to each firm given its
decision and
decision of its
Implications of the Prisoners Dilemma for
Oligopolistic Pricing
Price rigidity firms are reluctant to change prices even if
costs or demands change.
Price signaling form of implicit collusion in which a firm
announces a price increase in the hope that other firms will
follow suit.
Price leadership pattern of pricing in which one firm
regularly announces price changes that other firms then

Some or all firms explicitly collude.

They coordinate prices and output levels to
maximize joint profits.
Cartels can arise in markets that would
otherwise be competitive.

Conditions for Cartel Success:

1. It must be formed whose members agree
on price and production levels and then
adhere to that agreement.
2. Potential for monopoly power.