6370ecdfc21f7 Economics Sloman J

Market Structures
Compiled by Chris Mbukwa

Market Structure
• Market structure, depicts how firms are
differentiated and categorized based on the
types of goods they sell (homogeneous or
heterogeneous) and how their operations are
affected by external factors and elements.
Market structure makes it easier to
understand the characteristics of diverse
markets.
• The determination of Price and Output of
various products depends upon the type of
market structure in which the goods are sold
and produced.
Types of Market Structures
1. Perfect Competition
2. Monopoly
3. Monopolistic Competition
4. Oligopoly
1. PERFECT COMPETITION
A large # of buyers and sellers exchange

identical products under 5 conditions:
1. Large # of buyers and sellers
2. Products are identical between suppliers
3. Buyers and sellers act independently
4. Buyers and sellers are well-informed
5. Buyers and seller are free to enter,
conduct, or get out of business. NO
Barriers to entry other than start-up costs
or technology
Price and Output
One of the primary characteristics of perfectly competitive markets is
that they are efficient. In a perfectly. competitive market, price and
output reach their equilibrium levels.
Market Equilibrium in Perfect Competition
Supply
Price
Equilibrium
Price
Equilibrium
Quantity
Demand
Quantity
What types of businesses are
Perfectly Competitive?
• Farm Markets
• Many farmers selling their vegetables (Many
buyers and sellers)
• A carrot from farmer A is equal to a carrot from
farmer B (Identical Products)
• Buyers can compare prices and quality by
walking the market (Informed Buyers/Sellers)
• Farmers choose to bring produce or not.
Inexpensive to rent a space in the market (Free
Market Entry/Exit)
Are there many perfectly
competitive businesses?
• NO! All 4 of the conditions must be met for
perfect competition. This is very difficult in
most industries.
• Often people can only buy from one
supplier
• Products are rarely identical
• Buyers often do not know if a product is
cheaper/better at a different supplier
• Barriers to entry prevent free market
entry
Barriers to Entry
Def. Factors that make it difficult for new firms to enter
a market.
• Start-up Costs • Technology
The expenses that a Some markets require
new business must a high degree of
pay before the first technological know-
how. As a result, new
product reaches the entrepreneurs cannot
customer. easily enter these
Ex. Rent, machines, markets.
product, labor, etc. Ex. Software and
Pharmaceutical
companies
2. MONOPOLISTIC COMPETITION
In monopolistic competition, many companies
compete in an open market to sell products
which are similar, but not identical. Best
example: OTC pain relievers
• 1. Many Firms--As a rule, monopolistically
competitive markets are not marked by
economies of scale or high start-up costs,
allowing more firms.
• 2. Few Artificial Barriers to Entry--Firms in a
monopolistically competitive market do not
face high barriers to entry.
Monopolistic Competition
• 3. Slight Control over Price--Firms in a
monopolistically competitive market have
some freedom to raise prices because each
firm's goods are a little different from
everyone else's. EX: Tylenol, Aleve, and
Bayer
• 4. Differentiated Products--Firms have some
control over their selling price because they
can differentiate, or distinguish, their goods
from other products in the market. EX:
Excedrin better for headache than Tylenol
Non-Price Competition
• Non-price competition is a way to attract customers through
style, service, or location, but not a lower price
• 1. Characteristics of Goods--The simplest way for a firm to

distinguish its products is to offer a new size, color, shape,
texture, or taste.
• 2. Location of Sale--A convenience store in the middle of the
desert differentiates its product simply by selling it hundreds of
miles away from the nearest competitor.
• 3. Service Level--Some sellers can charge higher prices because
they offer customers a higher level of service. EX: Insurance
companies
• 4. Advertising Image--Firms also use advertising to create
apparent differences between their own offerings and other
products in the marketplace.
3. OLIGOPOLY
• Oligopoly describes a market dominated by a few large,
profitable firms through collusion or cartel. It is further away from
perfect competition than monopolistic competition is. Final
prices are higher for consumers.
• Collusion--an agreement among members of an oligopoly to set
prices and production levels. 2 forms of collusion: Price- fixing
is an agreement among firms to sell at the same or similar
prices. Dividing up the market is another. Collusion is illegal.
• Cartel--an association by producers established to coordinate
prices and production.
• Oligopolists act independently by lowering prices soon after the
first seller announces the cut, but they typically prefer non-price
competition.
• When there are only a few buyers, the market is defined as an
oligopsony.
Market Power
Def. The ability of a company to control
prices and output
Markets dominated by one or a few firms

(monopoly or oligopoly) have higher prices
and lower output. (great market power)
Markets with many sellers (monopolistic and
perfect competition) have lower prices and
higher output. (little or no market power)
Predatory Pricing
• Def. Setting the market price below cost
levels for short term to drive out
competitors.
• Firms in Monopolistic and perfect

competition do this to gain market
power.
Government and Competition
• The Government keeps firms from
controlling prices and supply of
important goods.
• Antitrust laws are laws that
encourage competition and break up
monopolies/oligopolies in the
marketplace
4 forms of Anti-trust Laws
1. Regulating Business Practices
Government can intervene if a firm has too much market
power
2. Breaking Up Monopolies
Antitrust laws have been used to break up monopolies
3. Blocking Mergers
A merger is a combination of two or more companies into
one firm. The government can block this if it decreases
competition
4. Preserving Incentives
allowing companies to merge if they show benefits to
consumers.
Deregulation
• Def. The removal of some government

controls over a market. It is used to
promote competition.
• Deregulation allows more competition in a
market, lowers prices and increases variety
(benefits), but often can lead to layoffs and
business closings (negatives) in the short
term because of the change.
4. MONOPOLY
• Def. a market dominated by a single seller.
• They form when barriers prevent competitors
from entering the market. This is often
because of the high costs to supply a
product.
• They take advantage of their monopoly
power and charge high prices.
• A monopsony consists of a market with a
single buyer. In general, when buyers have
some influence over the price of their inputs
they are said to have monopsony power.
• Advantages and disadvantages of
monopoly:
• Advantages:
• May be appropriate if natural monopoly
• Encourages R&D
• Encourages innovation
• Development of some products not likely
without some guarantee of monopoly in
production
• Economies of scale can be gained –
consumer may benefit
• Disadvantages:
• Exploitation of consumer – higher
prices
• Potential for supply to be limited - less
choice
• Potential for inefficiency –
X-inefficiency – complacency
over controls on costs
Types of Monopolies
• Economies of Scale--If a firm's start-up costs are high, and
its average costs fall for each additional unit it produces,
then it enjoys what economists call economies of scale. An
industry that enjoys economies of scale can easily become
a natural monopoly. Good example: Broadband and Cable
TV industries
• Natural Monopolies--a market that runs most efficiently
when one large firm provides all of the output. Sometimes
the development of a new technology can destroy a natural
monopoly.
• Geographic Monopoly—occurs when a location cannot
support two or more businesses EX: Small-town drugstore
or barbershop
• Government Monopoly—see next slide
Types of Gov’t Monopolies
• Technological Monopolies
The government grants patents, licenses that give the
inventor of a new product the exclusive right to sell it
for a certain period of time, and copyrights, the
exclusive right to protect written or performed work.
EX: Artists get lifetime + 50 yrs.
• Franchises and Licenses

A franchise is a contract that gives a single firm the right
to sell its goods within an exclusive market. A license is
a government-issued right to operate a business. Local
cable companies are frequently franchised.
• Industrial Organizations
In rare cases, such as sports leagues, the government
allows companies in an industry to restrict the number
of firms in the market.
Price Discrimination
Price discrimination is the division of customers
into groups based on how much they will pay for
a good.
• Although price discrimination is a feature of
monopoly, it can be practiced by any company
with market power. Market power is the ability to
control prices and total market output.
• Targeted discounts, like student discounts and
manufacturers’ rebate offers, are one form of
price discrimination.
• Price discrimination requires some market
power, distinct customer groups, and difficult
resale.

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6370ecdfc21f7 Economics Sloman J

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Market Structures

Compiled by Chris Mbukwa

A large # of buyers and sellers exchange

Market Equilibrium in Perfect Competition

• 1. Characteristics of Goods--The simplest way for a firm to

Markets dominated by one or a few firms

• Firms in Monopolistic and perfect

• Def. The removal of some government

• Franchises and Licenses

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