An Introduction to Market Structures: Perfect Competition, Monopoly and Things Between

Perfect Competition Monopoly Monopolistic Competition Oligopoly

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 today’s industries, but agricultural commodities are usually regarded as approximately perfectly competitive.

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.

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.

A few large producers Differentiated or standardized product Entry barriers Mutual interdependence A good example of this is your local gasoline market.

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.

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.

Is monopolistic competition close to monopoly? No, it is closer to perfect competition because it has many firms and relatively easy entry.

What are some examples of barriers to entry? Large advertising costs, patents, licenses, large capital investment

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.

Market StructureNumber of Firms Differentiated or Homogeneous Ease of Entry Perfect Competition Very manyHVery Easy Monopolistic Competition ManyD Relatively Easy OligopolyFewH/DNot Easy MonopolyOne Only one product of its kind Impossible

Market Structure Price- Setting Power Nonprice Competition Allocative and Productive Efficiency Long- Run Profits Examples Perfect Competition None (price taker)NoneHighly efficient0 Doesn’t exist-- agriculture Monopolistic Competition SomewhatConsiderable 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) SomewhatInefficientHigh Small-town newspaper, rural gas station