Economics "Ask the Instructor" Clip 12 Transcript
What are the major differences between the four market structures?
Let’s talk about that. It’s an important question and these differences will likely come up on
your next test.
The number of market participants is one of the most important factors that distinguishes one
market structure from another. Let’s take monopoly. Under monopoly there is only one seller of a good
for which there are no good substitutes. Cable TV, even in a community with only one cable provider,
might not be a good example of monopoly. Why not? Because households have access to satellite signals
and could view these as a substitute for cable in terms of both quality and price.
Your local water provider, though, would likely be a better example of monopoly because it is the
only provider of large quantities of water to your house; you would not likely consider bottled water a
feasible alternative for washing clothes or bathing.
At the opposite end of the continuum is perfect competition, or pure competition. In this case
there are so many market participants--both buyers and sellers-- that noone can influence price. The wheat
farmer is a good example of such a market. No individual farmer has control over the price. So, from the
individual firm’s perspective, demand is a horizontal line. Price is determined entirely by market forces
beyond the control of the individual producer.
The two in-between cases of market structure are monopolistic competition and oligopoly.
Monopolistic competition has attributes of both monopoly and perfect competition. It’s similar to
monopoly in that each firm has some hold over the consumer, based on location, friendliness of sales staff,
the hours the store is open each day, or brand name. A good example of monopolistic competition is the
retailing of gasoline. There are usually a large number of firms—convenience stores, super markets, and
traditional service stations—that retail gasoline. However, it’s likely that each seller has some control over
the price due to location or brand loyalty. For example, consumers are willing to pay a premium for certain
brands of gasoline perhaps because these brands are well advertised. Or there could be a reason such as the
gas station is conveniently located to where somebody lives or works. Thus, different retailers of gasoline
are able to charge difference prices and some are able to charge a much higher price than some others. On
the other hand, gasoline retailing is similar to perfect competition in that there are many firms and entry
into the market is relatively easy. Where I live, for example, Kroger, a large retail grocery operation, has
recently started selling gasoline at the retail level. Kroger owns no refineries and sells various brands of
gasoline under the Kroger name at discounted prices. In fact, the gasoline that I buy at Kroger’s may come
from a “name-brand” refinery. Nonetheless, gasoline (unlike No. 1 winter wheat) is a differentiated
product, at least in the minds of consumers, which allows some retailers to charge more than others.
Finally, there is the case of oligopoly. A few, large firms characterize this market. Oligopoly
differs from monopolistic competition in two major respects. First, in the number of firms and the size of
these firms. In the case of oligopoly the number is few and they tend to be larger in number than in the
case of monopolistic competition. Second, the number of firms is so few that each feels the effect of any
pricing, product design, or advertising decisions made by another firm in the industry. The automobile
industry is often given as an example of an oligopoly.
Higher education would also be an example of oligopoly. If State University A cuts tuition, the
effect will be noticed by Universities B and C. For this reason oligopoly is characterized by
interdependence among units.