Economics Market Structures

Four broad categories of market types Perfect competition „ Monopoly „ Monopolistic competition „ Oligopoly

Terminology to know market structure is the number of firms producing identical products which are similar/homogeneous Barriers to entry is the  are obstacles that make it difficult to enter that  market Product Differentiation is the is the process of distinguishing a product or service from others, to make it more attractive to a particular target market

Perfect competition - definition A market condition in which individual buyers and sellers have no power to affect the market price of a good or service. There are many buyers and sellers, and prices reflect supply and demand.

Perfect competition Many sellers „ Homogeneous product „ Easy entry and exit „ Perfect information about prices

Monopoly - definition A situation in which a single company or group owns all or nearly all of the market for a given type of product or service

Monopoly One producer „ Considerable power over price „ Unique product „ Very high barriers to entry

Oligopoly - definition a state of limited competition, in which a market is shared by a small number of producers or sellers.

Oligopoly - characteristics Only a few large sellers/firms many small niche firms examples: soft drinks, cereal, beer, oil, infant formula, automobile industry and airlines), Interdependence on pricing – when one changes their price the rest normally must too difficult market entry because the main companies are so large and control the market Must differentiated similar type products (computers, detergent, cars) when possible. National advertising – huge marketing budgets

Monopolistic Competition - definition A type of competition where many producers sell products that are somehow differentiated from one another (e.g. by branding or quality) and therefore are not perfect substitutes

Monopolistic Competition „ Many firms „ Differentiated products– products are close substitutes to each other „ Firms do not react very fast to each other’s actions (because there are so many) „ Easy entry and exit „ Examples: pizza, candy, restaurants, … Marketing is important: firms want to make their product unique

Characteristics of Market Types Market Structure Example Number of producers in the industry Types of products Power of firm over pricing Ease to enter the industry (barriers) Strategies for non-pricing competition Perfect Competition Agricultural products Many – Unlimited Standardized – almost identical None Easy – very few barriers Monopolistic Competition Pizza shops, retail trade, fast food Many Differentiation Some Easy- very few barriers Advertising and differentiation of product and service Oligopoly Auto Manufacturers, Breakfast Cereal, Computers Very Few Could be standardized or differentiated Hard – a large number of barriers Monopoly (legal) Public Utilities One Unique product Considerable Almost impossible – tons of barriers advertising

Small Business a small business is one that is independently owned and operated is organized for profit is not dominant in its field. is determined based on the average number of employees for the preceding twelve months (normally 500 or less in all locations combined) or on sales volume averaged over a three-year period.