Other Market Structures
I.Monopolistic Competition
a. Def: a market where there are many firms selling similar but
not identical products.
i. Example: Airline industry. Whether it is Sprint, United, or
NW, it is really providing the same function or utility.
What is different? Seats, price, experience, marketing, etc.
ii. Other examples: coffee shops (Starbucks v. Biggby v.
Caribou Coffee, gas stations, book stores, clothing stores,
etc.
b. Product differentiation
i. Def: the attempt to distinguish a product from similar products.
ii. Each firm’s product is slightly different than another firm’s; however,
they both serve the same purpose.
1. Example: Clothing, Old Navy v. J. Crew sweaters. Both keep you
warm, both are made of wool…but there might be a slight
difference in quality, cut, sizing, etc. (and, of course, price.)
c. Nonprice competition
i. Occurs when producers use factors other than price to convince
customers to buy their products.
1. Toy given in a kid’s meal at McDonald’s v. Burger King
2. I like a certain type of pen and I am willing to pay more for it.
II. Characteristics of Monopolistic Competition
a. Many Sellers & Many Buyers
i. Allows for meaningful competition. Sellers decide what to produce,
how much and what price to charge.
ii. A high number of restaurants in Clinton Twp lets you have a
variety of hamburgers to choose from and the prices will be
competitive.
b. Similar but Differentiated Products
i. Firms try to gain a monopoly-like power by making a distinctive
product or by convincing consumers that their product is
different/better than the competition.
1. Example: Brand names Hollister shirt v. Meijer shirt.
c. Limited Control of Prices
i. Because products are differentiated, firms can charge
different prices…up to a certain point. If prices become
too high, consumers can/will substitute brands.
d. Freedom to Enter or Exit Market
i. Generally there are few barriers to enter the market.
1. Example: if you want to open a hamburger stand it
does not require a lot of capital. It can be done.
III. Characteristics of an Oligopoly
a. Def: a market where only a few sellers offer a similar product. Less
competitive than monopolistic competition.
i. Market where few firms (4 – 5) dominate a large portion of the
market (80%).
b. Few Sellers & Many Buyers
i. A few firms dominate the market. It is not a single supplier like
a monopoly, but few firms control the market.
1. Example: Breakfast cereal industry is dominated by 4 large
firms that control 80% of the market.
c. Standardized or Differentiated Products
i. Standardized products: industrial products like steel,
aluminum, glass.
ii. Differentiated products: breakfast cereals, pop…
d. More Control over Prices
i. An individual firm does not decide what to do (supply, prices,
marketing, labor, etc.) without considering what other firms in
the industry will do.
ii. If Post cereal decides to lower prices, then the other 3 companies
will also reduce prices to remain competitive.
e. Little Freedom to Enter or Exit Market
i. Start-up costs for a new company can be very high.
ii. The well established brands can make competition too
difficult.
1. Cereal companies have a deal with supermarkets that
guarantee them the best shelf space.
2. Too much of a challenge to compete with an
established brand.