Module
Micro: 21
Econ: 57
Introduction
to Market Structure
KRUGMAN'S
MICROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The meaning and dimensions of market
structure.
• The four principal types of market
structure—perfect competition,
monopoly, oligopoly, and monopolistic
competition.
Market Structures
• The way a product is
supplied depends on
how the industry is
structured. Economists
define four different
market structures;
perfect competition,
monopoly, oligopoly,
and monopolistic
competition.
Defining Market Structures
• How many Firms?
• Type of product?
Perfect Competition
• Two necessary conditions for perfect
competition
• Firms are price-takers
• Free entry and exit
Monopoly
• A monopolist is a firm that is the only producer of
a good that has no close substitutes. An industry
controlled by a monopolist is known as a
monopoly.
• A monopoly industry has barriers to entry.
• Ownership of essential resources
• Economies of scale
• Technological superiority
• Government created barriers
Oligopoly
• An oligopoly is an industry characterized by a
small number of large firms with some degree of
market power.
• Characteristics of an oligopoly industry include;
• a few large firms
• barriers to entry
• interdependence
Measuring Market Power
• Four-firm Concentration Ratio (CR4): Add up
the market share of the four largest firms in
the industry.
• Herfendahl-Hirschmann Index (HHI): The
sum of the market shares, squared, for all
firms in the industry.
Measuring Market Power
•
Four-firm Concentration Ratio (CR4): Add up the market share of the four
largest firms in the industry.
•
Example:
•
The four largest firms in industry A have market shares equal to: 30%, 20%,
10% and 5%.
•
CR4 = 65%. The four largest firms have a combined 65% of the market.
•
Industry B has the four largest firms with market share equal to: 12%, 10%,
8% and 4%
•
CR4 = 34%.
•
If we compared these two industries, we would say that industry A has more
concentration and is much closer to being an oligopoly than industry B.
Measuring Market Power
• Herfendahl-Hirschmann Index (HHI): The sum of the market
shares, squared, for all firms in the industry.
• Suppose a industry is perfectly competitive and has 100s of
firms with market shares each at approximately zero percent of
the market.
• If we square a bunch of market shares close to zero, we will get
an HHI close to zero.
• What if we have a monopoly? Only one firm has market share of
100% so the HHI is 10,000.
• So real-world industries have HHI that lie between zero (the most
competitive) and 10,000 (the least competitive).
Monopolistic Competition
• Monopolistic competition is a market structure
characterized by
• Many firms
• Differentiated product
• No barriers to entry/exit
Table 57.1 The HHI for Some Oligopolistic Industries
Ray and Anderson: Krugman’s Economics for AP, First Edition
Copyright © 2011 by Worth Publishers