LESSON 2.
2 MARKET
STRUCTURE
March 8, 2021
LEARNING OBJECTIVES
• Define market structure
• Describe the characteristics and distinguish the
features of the market structures (perfect
competition, monopoly, monopolistic competition,
oligopoly)
• Apply the market structures in real-life situations
BUSINESS: MANI
WHAT IS MARKET
STRUCTURE?
MARKET STRUCTURE
•It is an economic model that allow
economists to examine competition
among business in the same industry.
MARKET STRUCTURE
• There are quite few different market structure
that can characterize an economy. However, if
you are just getting started with this topic, you
may want to look the four basic types of market
structures.
FOUR BASIC TYPES OF MARKET
STRUCTURE
•Perfect Competition
•Monopolistic Competition
•Monopoly
•Oligopoly
MARKET STRUCTURE
• Each of them has its own characteristics and
assumptions, which in turn affect the decision
making of firms and the profits they can make.
• It is important to note that not all of these market
structures exist in reality; some of them are just
theoretical constructs. Nevertheless, they are
critical because they help us understand how
competing firms make decisions.
FOUR BASIC TYPES
OF MARKET
STRUCTURES
PERFECT COMPETITION
• It describes a market structure, where many
small firms compete against each other. In this
scenario, a single firm does not have any
significant market power. As a result, the
industry produces the socially optimal level of
output, because none of the firms can influence
market prices.
PERFECT COMPETITION
• The idea of perfect competition builds several
assumptions:
a. All firms maximize profits
b. There is free entry and exit to the market
c. All firms sell entirely identical
d. There are no consumer preferences
PERFECT COMPETITION
• By looking at those assumptions, it becomes
obvious that we will hardly find perfect
competition in reality. That is an essential
aspect because it is only market structure that
can (theoretically) result in a socially optimal
level of output.
MONOPOLISTIC COMPETITION
• It also refers to a market structure, where many
small firms compete against each other. However,
unlike in perfect competition, the firms in
monopolistic competition sell similar but slightly
differentiated products. That gives them a certain
degree of market power, which allows them to
charge higher prices within a specific range.
MONOPOLISTIC COMPETITION
• The idea of monopolistic competition builds on the
following assumptions:
a. All firms maximize profits
b. There is free entry and exit to the market
c. Firms sell differentiated product
d. Consumers may prefer on product over the other
MONOPOLISTIC COMPETITION
• Those assumptions are a bit closer to reality
than the ones we looked at in perfect
competition. However, this market structure no
longer results in a socially optimal level of
output because the firms have more power and
can influence market prices to a certain
degree.
OLIGOPOLY
• It describes a market structure that is
dominated by a small number of forms. The
result in a state of limited competition. The
firms can either compete against each other or
collaborate. By doing so, they can use their
collective market to drive up prices and earn
more profit.
OLIGOPOLY
• The oligopolistic market structure builds on the
following assumptions:
a. All firms maximize profits
b. Oligopolies can set prices
c. Barriers to entry and exit exist in the market
d. Products may be homogenous or differentiated
e. Only a few firms dominate the market
OLIGOPOLY
• Unfortunately, it is not clearly defined what a
“few firms” means precisely. As a rule of
thumb, we say that an oligopoly typically
consists of 3-5 dominant firms.
MONOPOLY
• It refers to a market structure where a single
firm controls the entire market. In this scenario,
the firm has the highest level of market power,
as consumers do not have any alternatives. As a
result, monopolies often reduce output to
increase prices and earn more profit.
MONOPOLY
• The following assumptions are made when we talk
about monopolies:
a. The monopolies maximizes profits
b. It can set the price
c. There are high barriers to entry and exit
d. There is only one firm that dominates the entire
market
MARKET STRUCTURE
Perfect
Competition Monopoly
Monopolistic Oligopoly
Competition
Many Sellers Many Sellers Few/Small Number One seller
Homogenous Differentiated Differentiated One Product
Product
Free/Easy Entry Easy Hard No/Impossible
Entry
No Market Power Small Amount of Large Amount of Complete Market
Power Power Power
EXERCISE: MATCHING THE
BUSINESS TO THE MARKET
STRUCTURE
Directions: Read the descriptions of the business provided.
Analyze each description, identify the market structure that
best characterizes the business. Then, explain your reasoning.
The market structures are:
• Perfect Competition
• Monopolistic Competition
• Oligopoly
• Monopoly
HEALTHY AND HEARTY SOUPS
• Healthy and Hearty Soups produces a variety of
soups. There is considerable competition in the soup
market. However, Healthy and Hearty Soups has
spent several million of dollars on an advertising
campaign to convince consumers that their soups are
healthier than other soups. Because of this
advertising, Healthy and Hearty Soups charges a
higher price than the other soups on the market.
HEALTHY AND HEARTY SOUPS
• Type of Market Structure:
• Monopolistic Competition
• Reason:
• Because of advertisement and charges a
higher price than the other soups on the
market.
BILL’S SALMON SUPPLIER
• Bill’s Salmon Supplier sells fresh salmon to local
seafood restaurants. Every morning, Bill sails out to
sea to catch salmon and each afternoon, he returns to
sell his catch to local restaurants. There are hundreds
of fishermen catching and selling salmon. Because
the salmon Bill catches is just like the salmon caught
by the other fishermen, he can’t raise his price.
BILL’S SALMON SUPPLIER
• Type of Market Structure:
• Perfect Competition
• Reason:
• Because there are many fishermen selling the
same salmon that Bill is catching and he
cannot raise his price.
COUNTY CABLE
• County Cable supplies cable access to local
residents. It was very expensive business to start. The
entrepreneurs who started County Cable had to
provide underground wire for the entire community.
Other companies tried to compete, but the start-up
costs were simply too high.
COUNTY CABLE
• Type of Market Structure:
• Monopoly
• Reason:
• Because it was very expensive business to start.
Start-up costs is simply too high. County Cable is
the only provider of cable access to local
residents.
PERFECT PICTURE CAMERAS
• Perfect Picture Cameras is a national camera company. It competes
with a couple of other national camera companies. In order to gain
an upper hand in the market, Perfect Picture Cameras has
differentiated its camera by including an automatic focus and flash.
Perfect Picture Cameras has the ability to raise its prices because of
its unique features. However, federal regulators are always watching
the company to ensure that no collusion occurs with other camera
companies.
PERFECT PICTURE CAMERAS
• Type of Market Structure:
• Oligopoly
• Reason:
• Because it competes with a couple of other national camera
companies. Perfect Picture Cameras has the ability to raise
its prices because of its unique features. Federal regulators
are always watching the company to ensure that no collusion
occurs.
