Four Market Structures
• Perfect Competition
• Monopolistic Competition
• Many buyers and sellers participate in the
• Sellers offer identical products.
• Individual sellers have no control over the
price of the product.
• Sellers are able to enter and exit the market
Many Buyers and Sellers
• Many sellers so that no one seller can “fix
• No individual can be powerful enough to
buy or sell enough goods to influence the
total market quantity or market price.
Sellers offer identical products
• The sellers are price takers. They cannot
charge a price above the market price
because all other goods in the market are
• Commodity: A product that is considered
the same regardless of who makes or sells
it. (Examples: gasoline, notebook paper,
milk) Sometimes called homogeneous
Sellers are free to enter
and exit the market
• Sellers or firms must be able to enter
markets when they can make money and
leave them when they can’t earn enough to
stay in business.
• No barriers to entry.
– Factors that make it difficult for new firms to
enter a market are called barriers to entry.
Examples include start up costs and technology.
Advantages of Competition
• In a purely competitive market, resources
are allocated very efficiently.
• Market prices are just high enough to cover
costs of production. Profit is rare because if
profit exists, more suppliers will enter the
market and drive the price down which
eliminates the profit!
• Many firms.
• Few barriers to entry; easy to enter and exit
• Slight control over price.
• Differentiated products.
• Because there are so many firms in the
industry, it is difficult or impossible for
firms to collude to set the price of the
Few Barriers to Entry
• Because there are few barriers to entry, it is
relatively easy for firms to enter and exit the
Differentiated Products and
Slight Control Over Price
• Firms have some control over their selling
price because they can differentiate, or
distinguish, their goods from the other
products in the market.
• The degree of control over price depends on
the ability to differentiate.
Non price Competition
• Firms try not to compete on price alone.
Non price competition takes many forms
– Physical characteristics
– Service level
– Advertising, image, or status
Advantages for the Consumer
• Low prices because of fierce competition
and easy entry and exit.
• Great variety of goods
• Disadvantage: Sometimes creates artificial
needs for consumers.
• Single supplier
• Barriers to entry prevent entry into market
• Industry has control over the price of the
product; limited only by the demand curve.
• Type of product: unique
• Examples: hydroelectric plant which
generates electricity from a dam on a river.
A geographic monopoly is created when a store or firm
is the only business in the area that provides a good or
• A government monopoly exists when the
government is the sole provider of a
particular good and competition is
prohibited by law.
– Finland, Iceland, Norway, Sweden have
government owned corporations who have
exclusive rights for selling alcoholic beverages
– Canada: government is the only provider of
• Amtrak is a government owned corporation
and has monopoly status over intercity
Government Created Monopolies
• A monopoly can be created by the
government by issuing a patent, trademark,
copyright or a franchise.
• Patent: gives a company exclusive rights to
sell a new good or service for a specific
period of time.
• Franchise: a contract issued by a local
authority that gives a single firm the right to
sell its goods within an exclusive market.
Government Created Monopolies
• A natural monopoly is a market that runs most
efficiently when one large firm provides all of the
output. If a second firm enters the market,
competition will drive down the market price
charged to customers. One or both of the firms
will not be able to cover their costs and will go out
• Examples: Public water, telephone service (before
cellular service was available), hydroelectric
• A seller who has price control may choose
to price discriminate. This involves dividing
consumers into two or more groups and
charging a different price to each group
based on what these consumers are willing
• Examples: discounted airline fares, senior
citizens or student discounts
Conditions of Price Discrimination
• Firms that use price discrimination must
have some market power, customers must
be divided into distinct groups, and buyers
must not be in a position in which they can
easily resell the good or service.
Advantages for the Consumer?
• In the case of patents, franchises, copyright,
consumers get the benefit of a variety of
goods and services that they might not
otherwise get to enjoy.
• In the case of a natural monopoly, the
consumer can enjoy lower prices because
the firm can achieve economies of scale
(lower costs of production).
• Market dominated by a few large, profitable
– Companies must consider the response of
competitors when setting a price
• There are significant barriers to entry
• Sometimes oligopolies work together to set
prices and bar competing firms from the
• There may be some variety of goods or the
goods may be identical.
Barriers to Entry
• Oligopolies form when significant barriers
to entry keep new companies from entering
the market to compete with existing firms.
• Barriers to entry can include high startup
costs, such as expensive machinery or a
large advertising campaign.
• Examples: airline industry, car industry
Cooperation and Collusion
• Oligopolies present a challenge to
government because they often seem to
work together to set prices for the products
that they sell.
• Cooperation and collusion is anti-
competitive in nature
Advantages for the Consumer?
• As long as the firms don’t collude, the
market is very similar to a competitive
• If one firm gets too big or collusion occurs,
competition is limited and the consumer
• Choices and variety might be limited.