Market Structures
Chapter Six
Highly Competitive Markets
Consumers benefit greatly from highly
competitive markets
Two types:


Perfect Competition
Monopolistic Competition
Perfect Competition
Definition: Buyers (consumers) and
sellers (producers) compete directly and
fully under the laws of supply and
demand.
No one seller controls supply, demand,
or prices
Also called pure competition
Four Conditions of Perfect
Competition
1.
2.
3.
4.
Many buyers and sellers
Identical Products
Informed Buyers
Easy Market Entry and Exit
No market is perfectly competitive
Example: Agriculture Market in the
United States
Meeting the four conditions…
1.
2.
3.
4.
Independent buyers and sellers—farmers
Similar products—corn grown by a farmer in
GA is similar to corn grown in TN
Informed buyers—labels on produce
Easy Exit/Entry—suppliers can easily
change specialization in the market
Monopolistic Competition
Definition: market in which many
producers offer a similar, but not identical,
good or service
Similar to perfect competition in that it is
under supply and demand
Much more common than perfect
competition
Product Differentiation in
Monopolistic Competition
Sellers try to point out differences between
their products and those of their
competitors
Product differentiation used to set
products apart
Non-price Competition in
Monopolistic Competition
Competition through advertising, not price
Example: Blue jean market

“No-name” vs. designer
Profits
By setting a product apart from its
competitor, the seller can raise the price
above the competitive price
Done by: advertising, brand-name loyalty
Ex. Godiva Chocolate
Imperfectly Competitive Markets
Dominated by 1-4 sellers
Two types –


Oligopoly
Monopoly
Oligopolies (Oligopoly)
Most common noncompetitive market in
the US
Definition: market in which a few large
sellers control most of the production of a
good or service
3 Conditions of an Oligopoly
1. Few Large Sellers
Largest 3 or 4 sellers control 70% or more of
the market
2. Identical or Similar Products
3. Difficult Market Entry
Oligopolies at Work
Non-price competition: sellers attempt to
differentiate their products through
advertising and name-brand loyalty
Interdependent Pricing: Responding to the
prices of competitors
Pricing War: Sellers aggressively undercut
each other’s prices in an attempt to gain
the market share
Oligopolies at Work, Continued
Cartels: Companies openly organizing a
system of price setting and market sharing


International carters: diamonds, oil
Often unstable and short-lived
Collusion: Sellers secretly agree to set
production levels or prices

Illegal!!
Monopolies
Conditions opposite from perfect
competition
Conditions:
1.
2.
3.
Single Seller
No close substitutes
Difficult Market Entry
4 Types of Monopolies
1.
Natural Monopolies
Definition: Single seller that produces a good/service most
efficiently
Example: public and private utilities
2.
Geographic Monopolies
Limited by geographic location
Example: general store in a rural area
3.
Technological Monopolies
Develop when a producer develops a new technology
Example: trident submarines
Patents and copyrights
4.
Government Monopolies
Any market in which the government is the sole seller
Example: water, sewage, roads, bridges, canals
Monopolies at Work
3 forces limit seller’s control of prices
1.
2.
3.
Consumer demand
Potential Competition
Government Regulation