Unit #4: Market Structures

Market Characteristics

Market Structures

• Market Structure is the way an industry is organized:– Auto Industry versus the restaurant industry

Market Characteristics• Market characteristics of an industry determine

the pricing power of a business

• 4 market characteristics: – # of Firms– Type of Product– Ease of entering or exiting industry– Amount of Information

Determine pricing control

Number of Firms

• The number of competitors greatly influences how a firm behaves

Business # Firms

1) Restaurants Many

2) Auto Companies Several

3) Google Almost none

Type of Product Sold

• Is your product unique? (are there substitutes?)

• Wheat Farmers

• Porsche

Ease of Entry/Exit

• Very critical feature of a market structure

• Adam Smith assumed ease of entry for capitalism to be efficient…

Amount of Information

• Do buyers & sellers have access to market information?

• The internet has dramatically increased the flow of information

Degree of Price Control

• Price control determined by first 4 market characteristics

• Price Taker: firm has little/no control over price

• Price Setter: firm has some control over price

PerfectCompetition

MonopolisticCompetition Oligopoly Monopoly

“I hate Monopolies”

Perfect Competition is Adam Smith’s dream!

Most competitive Least competitive

4 Market Structures