Market Structures in a Free Market Economy Part III

Oligopoly Characteristics: Market dominated by small number of large sellers One firm can cause change in output, sales and prices of entire industry Product may be differentiated or standardized

Oligopoly, cont. Results: Still competitive, but further from pure competition than monopolistic competition Interdependent behavior: when one firm does something, others usually follow. Price wars – higher prices discouraged Price leadership – occurs when one firm initiates most of the price changes Non-price competition preferred May result in collusion (formal cooperation) such as price fixing

Oligopoly, cont. Examples: Auto industry Steel industry Airline industry Some industries are becoming oligopolistic: Soft drinks (Coke, Pepsi) Fast food (McDonald’s, Burger King, Wendy’s)

Monopoly Characteristics: Exact opposite of pure competition One seller of a product with no close substitutes Pure monopolies almost never exist. Most qualify as near monopolies.

Monopoly, cont. Types: Natural monopoly Geographic monopoly Costs minimized by having a single firm produce the product Firm usually more efficient when larger Examples: telephone, electricity, water Geographic monopoly Exists because of location Competition may eventually exist Examples: drugstore in small town, gas station at a lonely highway exit

Monopoly, cont. Technological monopoly Government monopoly Exists when a firm invents a new product Often protected temporarily by a patent Example: Microsoft Government monopoly Govt.-owned business without competition Usually involve products not adequately provided by private industry Examples: US Postal Service, water service in some towns