Market Structures

Markets
• A market facilitates the interaction of a buyer and a seller as they
complete a transaction
• Buyers, as a group, determine the demand
• Sellers, as a group, determine the supply
Competitive Markets
• Identical goods or services
• Enough buyers and sellers so that no participant can influence the
market price – everyone is a price taker
Imperfect Competition
• Goods or services that are not identical
• Restaurants, gas stations and hotels
• Markets dominated by single or small number of producers
• Computer operating systems, automobiles, diamonds,
Market Structures
Are products differentiated?

No Yes

One Monopoly N/A

How
many
producers Few Oligopoly
are
there?
Many Perfect Competition Monopolistic
Competition
Market Structures
Influence on Product Barriers to
# of Firms Advertising
Price Differentiation Entry

Perfect
Many None No No None
Competition

Monopolistic
Many Limited Some Yes Limited
Competition

Oligopoly Few Some Some Yes Significant

Pure
One Extensive No Yes Complete
Monopoly
Natural Monopolies
• Some industries are characterized by conditions that create barriers
to entry
• Location
• Economies of scale
• Utilities are the classic example
• Water
• Cable television
• Electricity
Protected Monopolies
• Barriers to entry in some industries are the result of specific
protections granted by government
• Licenses
• Patents
• Examples
• Concessions in national park
• Pharmaceuticals
Types of Firms
Sole Proprietorship

Partnership

Corporations
Sole Proprietorship

Advantages Disadvantages
• Ease of start-up • Unlimited personal
• Full control liability
• Sole receiver of • Limited access to
profit resources (including
• Easy to close financial capital)
• Limited life
Partnerships
• Articles of partnership or partnership agreement define rights and
responsibilities
• Types of partnerships
• General partnerships
• Limited partnerships
• Limited liability partnerships
Partnerships
Advantages Disadvantages
• Ease of start-up • Unlimited personal
• Shared decisionmaking liability
• Ability to specialize • Potential for conflict
• More access to financial • Limited life
capital
• Profit comes directly to
partners
Corporations
• Articles of incorporation create an independent entity
• Owners are called shareholders
• Shares may or may not be publicly traded
• Shareholders elect board of directors
• Board of directors selects leadership of the firm
Corporations
Advantages Disadvantages
• Ease of raising capital • Expense and difficulty
• Limited liability for of start-up
owners • Double taxation
• Transferable ownership • Owner-agent dilemma
• Unlimited life • Increased regulation
• Ability to hire experts and requirements