MARKET

STRUCTURE
COMPETITION AND
MARKET STRUCTURE
• How do varying market structures
impact prices in a market
economy?
WHAT ARE MARKETS?
A market is where buyers and sellers:
• meet to exchange goods and services.
• are affected by some level of competition.
 MARKET STRUCTURE
Characterized by the degree of competition
among business in the same industry

Types of Competition:
• Pure (Perfect) Competition
• Monopolistic Competition
• Oligopoly
• Monopoly
 PURE (PERFECT)
COMPETITION
When a large number of buyers and sellers
exchange identical products under five conditions
1. There should be a Large number of buyers
and sellers
2. The products should be Identical
3. Buyers and sellers should act Independently
 PURE (PERFECT)
COMPETITION
4. Buyers and sellers should be Well-
informed
5. Buyers and sellers should be Free to enter,
conduct, or get out of business
 PURE (PERFECT)
COMPETITION
Under a Pure Competition
– Supply and demand set the equilibrium
price
– Each firms sets a level of output that will
maximize its profits at that price
Imperfect Competition
– Refers to market structures that lack one
or more of the five conditions
MONOPOLISTIC COMPETITION
• Meets all conditions of perfect competition except
for IDENTICAL PRODUCTS
• Use product differentiation
– Real or imagined differences between competing
products in the same industry
• Use non-price competition
– Advertising, giveaways, promotional campaigns
• Sell within a narrow price range to try to raise the
price = profit maximization
 EXAMPLES OF MONOPOLISTIC
COMPETITION
Firms sell slightly differentiated products

Differentiation may be color, packaging, store

location, store design, store decorations, delivery,
service….. anything to make it stand out!
 WITH YOUR NEIGHBOR…
Think about a monopolistically competitive
company from which you have made a
recent purchase.
– What are the substitutes’ prices?
• Why can there be a range of prices?
– Why did you purchase the one you did?
 OLIGOPOLY
• A few large businesses dominate an industry
• When one business makes a move, the others
usually follow
– Ex: a price war…cuts in airline ticket
• Sometimes results in collusion or price-fixing
which is illegal
– Collusion: formal agreement to set prices
– Price-Fixing: charge the same
 MONOPOLY
One seller of a product that has no
close substitutes

– Natural Monopoly
– Geographic Monopoly
– Technological Monopoly
– Government Monopoly
 NATURAL MONOPOLY

Natural Monopoly – an industry in which

economies of scale are so important that only
one firm can survive.
In other words, it is more efficient for there to
be one firm in the industry.
Example: BCWD (we wouldn’t want multiple
water lines)
 GEOGRAPHIC MONOPOLY

No other business chooses to compete in that

area
– Ex: small town drugstore
TECHNOLOGICAL MONOPOLY

• Results from new discoveries and inventions.

• The government grants these monopolies
through the issue of patents and copyrights
– Patents: inventions
– Copyrights: publish
 GOVERNMENT MONOPOLY

• Involves products people need that private

industry might not adequately provide
 CHARACTERISTICS OF MARKET
STRUCTURES
Market # of Sellers Types of Barriers Control
Structure Products to Entry Over Price

Perfect Many Identical Low or Price takers

Competition none

Monopoly 1 Unique Extremely Price

high searchers

Monopolistic Many Slightly Easy entry Price

Competition differentiate searchers
d
Oligopoly Few sellers Identical or Difficult Price
slightly entry Searchers
differentiate
d