10. Type of Market Structure
• Economists have developed four primary
models of market structure: perfect
competition, monopoly, oligopoly, and
monopolistic competition.
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11. Type of Market Structure
• This system of market structure is based on
two dimensions:
– The number of firms in the market (one, few, or
many)
– Whether the products are identical or differentiated
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12. Types of Market Structure
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Are Products Differentiated?
How many
firms are
there? Oligopoly
Perfect
competition
No
One
Few
Many
Yes
Monopolistic
competition
Not applicableMonopoly
This system of market
structures is based on two
dimensions:
The number of producers
in the market (one, few,
or many)
Whether the goods
offered are identical or
differentiated
Differentiated goods are
different but considered
somewhat substitutable by
consumers (think Coke
versus Pepsi).
Not applicableDuopolyTwo
13. Perfect Competition
• A price-taking producer is one whose actions
have no effect on the market price of the good
it sells.
• A price-taking consumer is one whose
actions have no effect on the market price of
the good he or she buys.
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14. Perfect Competition
• In a perfectly competitive market, all
participants are price takers.
• In a perfectly competitive industry producers
are price takers.
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15. Two Necessary Conditions for Perfect
Competition
1) For an industry to be perfectly competitive, it must
contain many producers, none of whom has a large
market share.
– A producer’s market share is the fraction of the
total industry output accounted for by that
producer’s output.
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16. Two Necessary Conditions for Perfect
Competition
2) An industry can be perfectly competitive only if
consumers regard the products of all producers as
equivalent.
– A good is a standardized product, also known
as a commodity, when consumers regard the
products of different producers as the same good.
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17. Economics in Action
What’s a Standardized Product?
• A perfectly competitive industry has a
standardized product. People think the products
are the same.
• Producers may try to convince consumers that
their product is distinctive—even if it isn’t.
• So is an industry perfectly competitive if its
products are indistinguishable but consumers
perceive a difference?
• No. When it comes to defining the nature of
competition, the consumer is always right.
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18. Free Entry and Exit
• There is free entry and exit into and from an industry
when new producers can easily enter into or leave that
industry.
• Free entry and exit ensure that:
– the number of producers in an industry can adjust
to changing market conditions.
– producers in an industry cannot artificially keep
other firms out.
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19. Monopoly
• A monopolist is the only producer of a good
that has no close substitutes.
• An industry controlled by a monopolist is
known as a monopoly, such as De Beers.
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20. Monopoly
• The ability of a monopolist to raise its price
above the competitive level by reducing output
is known as market power.
• What do monopolists do with this market
power?
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21. Why Do Monopolies Exist?
• A monopolist has market power and as a result
will charge higher prices and produce less
output than a competitive industry. This
generates profit for the monopolist in the short
run and long run.
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22. Why Do Monopolies Exist?
• Profits will not persist in the long run unless
there is a barrier to entry. This can take the
form of:
– control of natural resources or inputs.
– increasing returns to scale.
– technological superiority.
– government-imposed barriers, including patents
and copyrights.
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23. Oligopoly
• Oligopoly, a common market structure, arises
from the same forces that lead to monopoly,
except in weaker form. It is an industry with
only a small number of producers. A producer
in such an industry is known as an oligopolist.
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24. Oligopoly
• When no one firm has a monopoly but
producers nonetheless realize that they can
affect market prices, an industry is
characterized by imperfect competition.
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25. Is It an Oligopoly—or Not?
• To get a better picture of market structure,
economists often use a measure called the
Herfindahl–Hirschman Index, or HHI.
• The HHI for an industry is the square of each firm’s
share of market sales summed over the firms in the
industry.
• For example, if an industry contains only three firms
and their market shares are 60%, 25%, and 15%:
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HHI = 602 + 252 + 152 = 4,450
26. Is It An Oligopoly or Not?
• According to Justice Department guidelines, an
HHI below 1,000 indicates a strongly
competitive market; 1,000 to 1,800 indicates a
somewhat competitive market; and over 1,800
indicates an oligopoly.
• In an industry with an HHI over 1,000, a
merger that results in a significant increase in
the HHI will receive special scrutiny and is
likely to be disallowed.
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28. Monopolistic Competition
In monopolistic competition:
• there are many competing producers.
• each producer sells a differentiated product.
• there is free entry and exit into and from the industry in
the long run.
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29. Summary
1. The four main types of market structure, based on the number
of firms in the industry and product differentiation, are perfect
competition, monopoly, oligopoly, and monopolistic
competition.
2. In a perfectly competitive market all producers and all
consumers are price takers—no one’s actions can influence
the market price.
3. Two conditions are necessary for a perfectly competitive
industry: many producers, none of whom has a large market
share, and a standardized product or commodity. A third
condition is often satisfied as well: free entry and exit into
and from the industry.
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30. Summary
4. A monopolist is the sole supplier of a good without
close substitutes. An industry controlled by a
monopolist is a monopoly.
5. Many industries are oligopolies, with only a few
sellers. A duopoly has only two sellers. Oligopolies
exist for more or less the same reasons as monopolies,
but in weaker form. They are characterized by
imperfect competition: firms compete but possess
market power.
6. Monopolistic competition is a market structure in
which there are many competing producers, each
producing a differentiated product, and there is free
entry and exit in the long run. 30 of 18
32. • ( সকললর সুপরা শথ ও িা ি কা না করফে।)
• Email: shafiqislam64@yahoo.com
ধনযবাদ
32
Editor's Notes
Figure 24-1: Types of Market Structure
The behavior of any given firm and the market it occupies are analyzed using one of four models of market structure—monopoly, oligopoly, perfect competition, or monopolistic competition. This system for categorizing market structure is based on two dimensions: (1) whether products are differentiated or identical and (2) the number of producers in the industry—one, a few, or many.
Notes to the Instructor: However, as recent events have shown, defining an industry can be tricky. In 2007, Whole Foods and Wild Oats, two purveyors of high-end organic foods, proposed a merger. The Justice Department disallowed it, claiming it would substantially reduce competition and defining the industry as consisting of only natural food groceries.
However, this was appealed to a federal court, which found the merger allowable since regular supermarkets now carried organic foods as well, arguing that they would provide sufficient competition after the merger. The Justice Department has appealed and, as of the time of writing, the case is still undecided.
