An Introduction to Market Structures: Perfect Competition,

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An Introduction toMarket StructuresPerfect
Competition, Monopoly and Things Between
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Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
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Perfect Competition

• Many small independent producers and consumers
• Firms produce a standardized product
• No barriers to entry or exit
• Firm are price takers

All four of the characteristics of perfect
competition are rarely found in todays
industries, but agricultural commodities are
usually regarded as approximately perfectly
competitive.
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Monopoly

• A single producer
• No close substitutes
• Barriers to entry
• Market Power

Again, it is rare to find a firm that satisfies
all of the characteristics of monopoly, but the
DeBeers firm holds a near monopoly on global
diamond production. The only gas station or bank
in a small town might also act as a local
monopolist.
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Monopolistic Competition

• Relatively large number of firms.
• Differentiated products.
• Easy entry and exit.

The market for shoes closely fits the description
of monopolistic competition. While all shoes
serve the same basic purpose, to cover and
protect the feet, a running shoe, a hiking boot,
and a flip-flop are very different and are made
by many different firms in the global market.
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Oligopoly

• A few large producers
• Differentiated or standardized product
• Entry barriers
• Mutual interdependence

A good example of this is your local gasoline
market.
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Let's consider some questions....
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What is the difference between homogeneous and
differentiated products?

• Homogeneous products are identical
  differentiated products differ in quality and
  type.
• Raw sugar is homogeneous candy bars are
  differentiated.

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What is the difference between perfect
competition and monopolistic competition?

• Under monopolistic competition, products are
  differentiated, and competition takes place in
  terms of both price and quality. In perfect
  competition, products are identical, and market
  forces set the price.

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Is monopolistic competition close to monopoly?

• No, it is closer to perfect competition because
  it has many firms and relatively easy entry.

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What are some examples of barriers to entry?

• Large advertising costs, patents, licenses, large
  capital investment

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What is the distinguishing characteristic of
monopoly?

• One supplier in an industry, a particular
  geographic location, or a particular market in
  which other suppliers are unable to compete.

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Answers for Activity 24
Market Structure Number of Firms Differentiated or Homogeneous Ease of Entry
Perfect Competition Very many H Very Easy
Monopolistic Competition Many D Relatively Easy
Oligopoly Few H/D Not Easy
Monopoly One Only one product of its kind Impossible
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Answers for Activity 24
Market Structure Price-Setting Power Nonprice Competition Allocative and Productive Efficiency Long-Run Profits Examples
Perfect Competition None (price taker) None Highly efficient 0 Doesnt exist--agriculture
Monopolistic Competition Somewhat Considerable Less efficient than PC 0 Fast food, retail, cosmetics
Oligopoly Limited Considerable for a differentiated oligopoly Less efficient than PC Positive Cars, steel, soft drinks, cereals, computers
Monopoly Absolute (price maker) Somewhat Inefficient High Small-town newspaper, rural gas station
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The Costs of Production