The Four Types of Market Structure Tap water Electricity Monopoly Novels Movies Monopolistic...

The Four Types of Market Structure

• Tap water• Electricity

Monopoly

• Novels• Movies

MonopolisticCompetition

• Tennis balls• Crude oil

Oligopoly

Number of Firms?

Perfect

• Wheat• Milk

Competition

Type of Products?

Identicalproducts

Differentiatedproducts

Onefirm

Fewfirms

Manyfirms

Copyright © 2004 South-Western

Types of Markets

• MonopolyMonopoly• Only one firm with one product

• Monopolistic CompetitionMonopolistic Competition• Many firms selling products that are similar but not

identical.

• OligopolyOligopoly• Only a few sellers, each offering a similar or identical

product to the others.

• Perfect CompetitionPerfect Competition• Unlimited firms selling products that are identical.

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MONOPOLYMONOPOLY

• A monopoly firm is a price maker

• A firm is considered a monopoly if . . .• it is the sole seller of its product.• its product does not have close substitutes.

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WHY MONOPOLIES ARISE

• The fundamental cause of monopoly is barriers to entry.

• Barriers to entry have three sources:• Ownership of a key resource.

• The government gives a single firm the exclusive right to produce some good.

• Costs of production make a single producer more efficient than a large number of producers.

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Government-Created Monopolies

• Governments may restrict entry by giving a single firm the exclusive right to sell a particular good in certain markets.

• Patent and copyright laws are two important examples of how government creates a monopoly to serve the public interest.

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Increasing Competition with Antitrust Laws

• Two Important Antitrust Laws• Sherman Antitrust Act (1890)

• Reduced the market power of the large and powerful “trusts” of that time period.

• Clayton Act (1914)• Strengthened the government’s powers and authorized

private lawsuits.

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Monopolistic CompetitionMonopolistic Competition

• Markets that have some features of competition and some features of monopoly.

• Attributes of Monopolistic Competition• Many sellers• Product differentiation• Free entry and exit

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Monopolistic Competition

• Many Sellers• There are many firms

competing for the same group of customers.• Product examples

include books, CDs, movies, computer games, restaurants,

fast food, cookies, furniture, etc.


Monopolistic Competition

Easy Entry or Exit

• Firms can enter or exit the market without restriction.

Product Differentiation• Each firm produces a product that is at least slightly

different from those of other firms.• Rather than being a price taker, each firm faces a

downward-sloping demand curve.

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ADVERTISING

• When firms sell differentiated products, each firm has an incentive to advertise in order to attract more buyers to its particular product.

• Overall, about 2 percent of total revenue, or over $200 billion a year, is spent on advertising.

• Critics of advertising argue that firms advertise in order to manipulate people’s tastes.

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OLIGOPOLY OLIGOPOLY

Characteristics of an Oligopoly Market• Few sellers offering similar or identical products• Interdependent firms

Collusion• An agreement among firms in a market about

quantities to produce or prices to charge.

Cartel• A group of firms acting in unison.

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INTERDEPENDENCE

• Because the number of firms in an oligopolistic market is small, each firm must act strategically.

• Each firm knows that its profit depends not only on how much it produces but also on how much the other firms produce.

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Jack and Jill Oligopoly Game

Jack’s Decision

Sell 40Gallons

Sell 40 Gallons

Jack gets$1,600 profit

Jill gets$1,600 profit







Sell 30 Gallons

Sell 30Gallons

Jill’sDecision

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Perfect CompetitionPerfect Competition

• A perfectly competitive market has the following characteristics:

• There are many buyers and sellers in the market.• The goods offered by the various sellers are largely

the same.• Firms can freely enter or exit the market.

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WHAT IS A COMPETITIVE MARKET?

• A competitive market has many buyers and sellers trading identical products so that each buyer and seller is a price taker.

• Buyers and sellers must accept the price determined by the market.

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The Four Types of Market Structure Tap water Electricity Monopoly Novels Movies Monopolistic...

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