The document discusses four main types of market structures: perfect competition, monopolistic competition, oligopoly, and monopoly. Each structure has distinct characteristics, such as the number of sellers, product differentiation, and barriers to entry, impacting pricing and competition strategies. The report aims to provide a comprehensive understanding of these market structures to aid the mayor in assessing local businesses.

1. Running head: MARKET
Market Structures
Shaye Lingo
ECO 204
Instructor:
October 29, 2013

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Dear Mayor Andrews,
Thank you for the opportunity to serve as your market consultant; I am honored.
I have put together a report for you that will help give you a better understanding of the various
types of marketing systems in your community. I will discuss the four types of market structures
and some very important characteristics of each market type, as well as some other important
details and features of each.
Allow me to begin with the four types of market structures which are as follows: perfect
competition, monopolistic competition, oligopoly, and monopoly.
Perfect competition is the market structure in which there are many sellers and buyers, firms
produce a homogeneous product, and there is free entry into and exit out of the industry
(Amacher, Pate, 2013).” Perfect competition is a theoretical model and there is actually no real
data on this model because in reality it does not exist and is an abstract ideal in which to compare
other market structures and to help develop tools of analysis in order to determine price and
quantity in the markets that are closely following this model. In perfect competition the idea is
that each seller is producing and selling the exact same product for the exact same amount and
each seller has close to the same amount of buyers. A good example of this would be potato
farmers; all potato farmers are selling the same product and it is assumed that because there are
so many potato producers, no one seller can influence the price of the market on this product so
all potato farmers must sell at the same price to maximize profit. The perfect competition model
assumes that all potatoes are the same and the buyer does not care if they buy from farmer A or
farmer B. This is one very important characteristic of perfect competition, “perfectly competitive
firms produce a homogeneous product. Homogeneous means that the product of one firm is no

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different from that of other firms in the industry. Since this is the case, purchasers have no
preference for one producer over another (Amacher, Pate, 2013).” However, the reason that
perfect competition does not really exist is because all potatoes are not exactly the same and,
even if they were some of them will be packaged differently or have better sales staff causing
buyers to choose one brand over another. The potato producers will need to stay close to the
market price but they do have room to charge different prices as most buyers will prefer one over
the other. Another very important characteristic to this model is the ease of entry and exit; a
seller can begin selling or quit selling any time they choose. “A very important assumption, is
that there is free entry into and free exit out of the market. This means that if one firm wishes to
go into business or if another firm wishes to cease production, either can do so without any kind
of constraint (2013).”
Moving on to monopolistic competition; “The model of monopolistic competition describes
an industry composed of a large number of sellers. Each of these sellers offers a differentiated
product, which is a good or service that has real or imagined characteristics that are different
from those of other goods or services (Amacher, Pate, 2013).” This market structure is very
similar to that of perfect competition except that these sellers are selling products a little different
from the others; they try to make their product stand out against the competition by making it
look, feel, smell, taste or sound better or different from the next guys. Also advertising is a big
part of monopolistic competition such as the competition between Nike and Reeboks; when Nike
advertised using Michael Jordan they began outselling Reebok by a landslide and still is a top
selling shoe. Shoes or fast food restaurants for example, are called product groups in that, they
are both markets for a set of goods that have a large number of close substitutes but are
differentiated in one way or another. Such as Burger King has the Whopper and McDonalds has

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the Big Mac. A very important characteristic of this model is that anyone can enter the market
and begin selling products that are almost the same as a firm that is already in the market selling
that product. No one firm can monopolize the production or sales of shoes or food or any other
retail product and the same would follow for services such as automobile repair shops or
cleaning services. Another important characteristic of monopolistic competition is that the more
firms that enter the market the less money the original firms will make. “In the short run, the
monopolistically competitive firm is producing the profit-maximizing output and searching for
the best price that can be charged for this output. In the long run, the economic profits disappear
as new firms enter the industry. The demand curve of each firm then shifts to the left because
market demand is shared by more firms (Amacher, Pate, 2013).”
Oligopoly is another market structure and is somewhat different from the previous two
models discussed. “Oligopoly is the market structure in which a few firms compete imperfectly.
The scarcity of sellers is the key to firms' behavior in oligopoly. In oligopoly, firms realize that
their small number produces mutual interdependence. As a result, each firm will forecast or
expect a certain response from its rivals to any price or output decision that it might make
(2013).” This means that there will only be a few firms competing in the same category or
sometimes a few firms will dominate a specific market. One good example, although there are
many examples, is commercial airlines. While there are several airlines, a few dominate the
market; some of the major players are American Airlines, Southwest Airlines, and Delta
Airlines. "So long as there are only a few massive firms in an industry, each must act with a view
of the welfare of all." (Galbraith, 1956, p.83) This view, which is not widely held among
economists, regards oligopoly as shared monopoly. Shared monopoly is the model of oligopoly
that says that oligopolists coordinate decisions and share markets to act as a monopoly

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(Amacher, Pate, 2013).” Airlines are a perfect example of this shared monopoly as they all
charge almost exactly the same prices and coordinate their efforts to keep new firms from
entering the market. There are two different types of oligopolies; one is a pure oligopoly
meaning that the few sellers in that particular market are selling a homogeneous product such as
the potato farmers and the other is a differentiated oligopoly meaning that the few sellers are
selling different products such as vehicles. “In differentiated oligopolies, there are price clusters,
which are groupings of prices for similar, but not homogeneous, products. The range of prices
within a cluster will depend on the amount of product differentiation. The more differentiated the
products, the greater the price divergence. Tight price clusters indicate very little product
differentiation (2013).” Two very important characteristics of an oligopoly are that they are price
setters rather than price takers and barriers to entry are high. In other words it is very difficult to
enter the market due to various different reasons.
We are now on monopoly; monopoly is at the other end of the market continuum from
perfect competition because perfect competition involves many sellers and monopoly involves
one seller. “Monopoly is the market structure in which there is a single seller of a product that
has no close substitutes (2013).” While there are no pure monopolies there are some companies
that have some degree of monopoly power; which means that they are monopolizing that
particular market and can set whatever price is required to maximize their profits with little or no
competition. A good example of monopoly is utility companies such as internet or cable where
only one or two companies are operating in a single town and they are able to charge whatever
they need to, to optimize their profits; if they had competition they would be forced to lower
their prices in order to compete. However, “A monopolist still has to follow the law of demand
and must lower price in order to sell more units of output. The price reduction applies to all units

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of output that the monopolist sells, not just the last, or marginal, unit (Amacher, Pate, 2013).”
Some very important characteristics of a monopoly are that they are a single firm selling all
output in a market, “and restrictions on entry into and exit out of the industry, and more often
than not specialized information about production techniques unavailable to other potential
producers (http://www.amosweb.com).”
To provide you with an example MR. Andrews, I will use our home town grocery store, the
“Piggly Wiggly” This is the only grocery store in our town and they have the monopoly on the
grocery market. They have the monopoly because they have no competition; they are the only
firm that sells groceries in this town. Even though they currently have the monopoly in that
market there are no real barriers so other markets can move in and begin competing which would
then make them an oligopoly market. If several more grocery stores come into the picture they
would then become closer to the perfect competition model. As of now however, they are a
monopoly and have the ability to be a price searcher which means that can set prices in order to
maximize their profits; if they had competition they would be forced to lower their prices in
order to keep their customers from going to the competition.
Entry barriers into a market is the next subject at hand; when the entry barriers are low,
meaning that anyone can enter the market without very much difficulty and begin selling similar
products such as those already on the market; there long run profitability will decrease. Since the
entry barriers are low and it is easy to get in, more and more people or firms will do so if they
see the possibility of a profit. The more firms that enter the market the less profit all the firms
will make. In the example of a monopoly, if more firms enter the market the monopoly will not
be able to continue. “If there is new entry, there is no longer a monopoly. If a monopoly is to
persist, there must be some forces at work to keep new firms from entering. Barriers to entry are

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natural or artificial obstacles that keep new firms from entering an industry. Without such
barriers, monopoly cannot continue (Amacher, Pate, 2013).” On the other end of the spectrum;
there is perfect competition and monopolistic competition where there are practically no entry
barriers and anyone can join the market in turn decreasing the long run profitability because
there are too many sellers.
In firms with high barriers to entry they have the pressure of trying to keep other markets out
and keep the competition minimal. There will usually be extremely high startup costs for firms
entering a market with high entry barriers and then they must be able to sell their product or
service in order to gain some return on the startup investment. This means that will have to outdo
their competition. “ The lowest priced firm captures all demand. If both firms must share
industry demand when prices are equal, the firm currently choosing its price could receive all
demand by undercutting its rival’s price by an infinitesimally small amount. As a consequence, a
best response may not be well defined for all prices, because on a continuum, a next lowest price
does not exist. I therefore assume that if prices are equal, consumers buy from the firm that has
most recently declared its price (Davies, 1991).” Most of these firms have sunk costs which are
high in comparison to short term profits and they must concentrate on keeping out all
competition as competition would take their profits from them.
Each market model has its own price elasticity of demand starting with perfect competition;
this market is perfectly elastic because there typically is so much competition that they must be
price takers instead of price setters and all firms in the industry must sell at the same price to
maximize their profits. “The firm takes that price as its selling price. If it sets a higher price,
none of its output will be sold because buyers will be able to purchase an identical product at the
lower market price elsewhere. On the other hand, it makes no sense to sell below the market

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price because the firm can sell all it produces at that market price (Amacher, Pate, 2013).” In
monopolistic competition the price elasticity of demand depends on the differentiation of the
products being sold. “If the products are only slightly differentiated, then they are close
substitutes and each firm's demand curve will be very elastic. If the products are highly
differentiated, the demand curve will be less elastic, indicating that the firm can more easily raise
the price without losing many customers. Its customers don't change products because they don't
view them as substitutes (2013).” In an oligopoly firms practice profit maximization separately
but are interdependent on the other firms in their market “Each firm tries to anticipate the
response of its rivals and then takes that prediction into account when making decisions (2013).”
Price is somewhat inelastic. In a monopoly the firm has extensive market control making the
price elasticity of demand perfectly inelastic. The price is what it is and there is no competition
to change it. The government sometimes has to get involved to keep a ceiling on the prices so
that the average person can afford the product or service.
In closing, I hope this report has given you a better view of the businesses in your
community and a clear view of how the market structures operates remember that there are four
market structures and each of them have very unique qualities.

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References:
Davies, S., (1991). Dynamic Price Competition, Briefly Sunk Costs, and Entry Deterrence. The
Rand Journal of Economics; volume 22 no. 4. Retrieved from, http://search.proquest.com.proxylibrary.ashford.edu/abicomplete/docview/236573010/14184E23B734E8664D1/25
Monopoly Characteristics, (2013). AmosWEB Encyclonomic WEB*pedia, Retrieved from,
http://www.AmosWEB.com

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