The document discusses different market structures: perfect competition, monopoly, monopolistic competition, and oligopoly. It provides characteristics of each, including the number of buyers and sellers, product differentiation, barriers to entry/exit, profit maximization where marginal revenue equals marginal cost, and equilibrium price and output. Monopolistic competition is defined as having many firms that can differentiate products somewhat and face relatively easy entry/exit into the industry. Examples of monopolistic competition include restaurants, plumbers, and hairdressers.

2.  Market structure refers to the number and size of
buyers and sellers in the market for a good or
service.
 A market can be defined as a group of firms
willing and able to sell a similar product or service
to the same potential buyers.

3.  4 broad categories –
1. Perfect competition
2. Monopoly
3. Monopolistic competition
4. Oligopoly

4.  Number of sellers
 Product differentiation
 Entry and exit conditions

5.  AR, MR
 AC, MC
 The point where MR = MC ( Profit maximum )
 Q* ( Equilibrium Output )
 P* ( Equilibrium Price )

6.  Features –
1. Large number of buyers and sellers
2. Products are perfect substitutes of each
other; homogeneous products
3. Free entry and exit from the market
4. Perfect knowledge of the market to both
buyers and sellers
5. No govt. intervention
6. Transport cost are negligible hence don’t
affect pricing.

9. Quant it y
(Q)
Price
(P)
Tot al Revenue
(TR= PxQ)
Average Revenue
(AR= TR/ Q)
Marginal Revenue
(MR= )
1 $6.00 $6.00 $6.00
2 $6.00 $12.00 $6.00 $6.00
3 $6.00 $18.00 $6.00 $6.00
4 $6.00 $24.00 $6.00 $6.00
5 $6.00 $30.00 $6.00 $6.00
6 $6.00 $36.00 $6.00 $6.00
7 $6.00 $42.00 $6.00 $6.00
8 $6.00 $48.00 $6.00 $6.00

10. D
S
Q Q
PP
Industry Firm
P* P*
ACMC
Q* Q*
E
C B
A AR = MR

11.  A monopoly has only one seller, who is able to
influence the total supply and price of the goods
and services. Further, there are no close
substitutes for the goods produced by the
monopolist and there are barriers to entry.

12.  Single producer
 Single firm in the industry
 No competition
 Control over price
 Entry or exit are blocked

13.  Features of an oligopolistic market structure:
◦ Price may be relatively stable across the industry –
kinked demand curve?
◦ Potential for collusion
◦ Behaviour of firms affected by what they believe their rivals
might do – interdependence of firms
◦ Goods could be homogenous or highly differentiated
◦ Branding and brand loyalty may be a potent source of competitive
advantage
◦ Non-price competition may be prevalent
◦ Game theory can be used to explain some behaviour
◦ AC curve may be saucer shaped – minimum efficient scale
could occur over large range of output
◦ High barriers to entry

14. Price
Quantity
D = elastic
D = Inelastic
£5
Kinked D Curve
The principle of the kinked demand
curve rests on the principle
that:
a. If a firm raises its price, its
rivals will not follow suit
b. If a firm lowers its price, its
rivals will all do the same
Assume the firm is charging a price of
£5 and producing an output of 100.
If it chose to raise price above £5, its
rivals would not follow suit and the firm
effectively faces an elastic demand
curve for its product (consumers would
buy from the cheaper rivals). The %
change in demand would be greater
than the % change in price and TR
would fall.
Total Revenue A
Total
Revenue B
If the firm seeks to lower its price to
gain a competitive advantage, its rivals
will follow suit. Any gains it makes will
quickly be lost and the % change in
demand will be smaller than the %
reduction in price – total revenue
would again fall as the firm now faces
a relatively inelastic demand curve.
Total Revenue B
Total Revenue A
The firm therefore, effectively faces
a ‘kinked demand curve’ forcing it to
maintain a stable or rigid pricing
structure. Oligopolistic firms may
overcome this by engaging in non-
price competition.

15.  Where the conditions of perfect competition do
not hold, ‘imperfect competition’ will exist
 Varying degrees of imperfection give rise to
varying market structures
 Monopolistic competition is one of these – not to
be confused with monopoly!

16. Characteristics:
Large number of firms in the industry
May have some element of control over price due to the
fact that they are able to differentiate their product in some
way from their rivals – products are therefore close, but not
perfect, substitutes
Entry and exit from the industry is relatively easy – few
barriers to entry and exit
Consumer and producer knowledge imperfect

17.  Some important points about monopolistic
competition:
◦ May reflect a wide range of markets
◦ Not just one point on a scale – reflects many degrees
of ‘imperfection’
◦ Examples?

18.  Restaurants
 Plumbers/electricians/local builders
 Solicitors
 Private schools
 Plant hire firms
 Insurance brokers
 Health clubs
 Hairdressers
 Funeral directors
 Estate agents
 Damp proofing control firms

19.  In each case there are many firms
in the industry
 Each can try to differentiate its product
in some way
 Entry and exit to the industry is relatively free
 Consumers and producers do not have perfect
knowledge of the market – the market may indeed be
relatively localised. Can you imagine trying to search out
the details, prices, reliability, quality of service, etc for
every plumber in the UK in the event of an emergency??