A Spectrum of Markets

4 Kinds of Markets Pure or “Perfect” Competition Monopolistic Competition Oligopoly Pure or Perfect Monopoly

4 Kinds of Markets “Pure or perfect competition” and “pure monopoly” represent opposite ends of the spectrum of markets “Monopolistic competition” and “oligopoly” represent the actual conditions faced by MOST firms.

Perfect Competition Perfectly competitive markets are ones in which: Uniform good and services are sold. Prices are generally known. There is competition in the market between buyers and sellers. No group of buyers or sellers attempts to fix prices. (supply and demand curves apply mainly to these markets)

Perfect Competition An example would be the stock exchange. If you wish to buy shares in a certain company, one share of the common stock is the same as the next. Prices are generally known. No one person or group of people controls the prices.

Perfect Competition Firms in perfectly competitive markets are known as “price-takers” because they have to accept the prevailing price. Easy to enter this market Perfect competition is rarely achieved.

Monopoly A market situation where there is only one producer of a good or service and many buyers. Very difficult if not impossible to enter this market.

Monopoly Kinds of monopolies: Natural monopoly. Ex. Electrical service (it is more efficient to have everyone plugged into one system. Legal monopolies. Ex. Public transit (when government makes it illegal for more than one company to supply a good or service.

Monopoly Kinds of monopolies: Combines or Cartels. When a group of producers agree to limit competition by fixing prices, limiting output or dividing the market geographically among them. ILLEGAL

Monopoly What is the problem? Usually on products or services with inelastic demand (ex. telephone or power company) Inelastic demand + no competition among producers = expensive, poor quality. For this reason, governments regulate (monitor quality and control prices) or own the monopoly to protect the customer.

Oligopoly A kind of market where a few firms supply most of the goods and services. Ex. Automobile makers, Oil companies, Cereal makers Difficult to enter this market.

Oligopoly 2 kinds of oligopoly Homogeneous oligopoly. When products being produced are virtually identical. Ex. Oil companies. Differentiated oligopoly. When companies strive to make distinct products. Ex. Automobile makers.

Oligopoly Why do oligopolies exist? Certain products require large-scale operations for production. Cooperation among Oligopolies. If cooperation is low and competition high among oligopolies, prices will be high.

Monopolistic Competition A market situation in which there are many sellers providing a similar but not identical good or service. Ex. Fast food. Easy to enter this industry.

Monopolistic Competition Many suppliers Products similar but not identical (which gives supplier some individual control over price). Monopolistically competitive = firms compete with each other, but each has a monopoly on its particular product.