The Nature of Markets

Chapter Focus
 The four market structures– perfect competition,
monopolistic competition, oligopoly, and
monopoly—and the characteristics of each
 The demand conditions for businesses in each
market structure
 Nonprice competition through product
differentiation and advertising
 Industrial concentration—how it is measured,
and the arguments for and against it
 Market Structures
Perfect Competition
 A market structure characterized by many
buyers and sellers of a standard product and
easy entry to and exit from the industry

1. Many Buyers and Sellers

2. Standard Product
3. Easy Entry and Exit
 Market Structures
Monopolistic Competition
 A market structure characterized by many
buyers and sellers of slightly different
products and easy entry to, and exit from, the
industry

Oligopoly
 A market structure characterized by only a
few businesses offering standard or similar
products and restricted entry to the industry
 Market Structures
Monopoly
 A market structure characterized by only one
business supplying a product with no close
substitutes and restricted entry to the industry

Entry Barriers
 Economic or institutional obstacles to
businesses entering an industry
 Types of Entry Barriers
1. Economies of Scales
 Natural monopoly: a market in which only
one business is economically viable because
of a economies of scale

2. Market Experience

3. Restricted ownership of Resources

 Types of Entry Barriers

4. Legal Obstacles

5. Market Abuses Predatory pricing: an

unfair business practices of temporarily
lowering prices to drive out competitors
in an industry
6. Advertising
 Market Power
Market Power
 A business’s ability to affect the price of the
product it sells

1. Number of Competitors
2. Size
3. Price Elasticity of Demand
 Demand Differences
Business’s demand curve
 The demand curve faced by an individual business, as
opposed to an entire market
 Demand Differences
Monopolistic Competitor
Oligopoly

Mutual interdependence
 The relationship among oligopolists, in which the actions of each business
affect the other businesses

Rivalry Among Businesses

 Market share
 A business’s proportion of total market sales
 Demand Differences
Monopoly
 Nonprice Competition

Nonprice Competition and the Consumer

 Product differentiation leads to higher prices

by raising per-unit costs and enhancing an
individual business’s market power. However,
consumers will likely have more choices
because of businesses efforts to differentiate
their products
 Nonprice Competition
Nonprice Competition
 Efforts to increase demand through product
differentiation, advertising, or both

1. Product Differentiation
 Efforts to make a product distinct from that
competitors

2. Advertising
 raises prices for consumers
 offer more variety and choice
 raises profits for business
 Industrial Concentration
Concentration Ratio
 The % of total sales revenue in a market
earned by the largest business
The Debate Over Industrial Concentration
Industrial concentration
 Domination of a market by one or a few large
companies ( 4 firms > 50% sales revenue)

 Arguments for
1. Economies of scale
2. Technical innovation

 Arguments against:
1. Market power (higher price)
2. Lack of competition ( poorer quality, less innovation)
 Monopolistic Oligopoly Oligopoly
Kind of Market Pure Competition Pure Monopoly
Competition (Homogeneous) (Differentiated)

• Many
Number of  Many sellers  Few sellers  Few sellers  One seller
sellers
producers and  Some product  Some product  Much product  No product
• Identical
type of product distinction distinction distinction substitutes
product

 Very difficult
Conditions of
 Easy to  Easy to enter  Difficult to or
entry into  Difficult to enter
enter the enter impossible
industry
to enter

 Limited by  Limited by  Considerabl

interdependence interdependen e control
Influence over  No control  Some control
or firms ce of firms— over price –
price over price over price
 Some control “price “ price
over price searcher” maker”

 Considerable
Existence of  Some— non-price  Advertising
 Little use made
non-price  None especially competition— of firm’s
of advertising
competition advertising like “image”
advertising

 Electrical
 Stock  Automobiles energy
 Retail trade  Steel
market  Tires  Water
 Clothing  Aluminium
Example:  Certain  Breakfast  Gas
 Many services  Pulp
agricultural cereals  Urban
industries  Cement
markets  Soap transit
system