Chevalier
Fall 2015
Perfect Competition
 1-large numbers of buyers and sellers
 Deal in identical products (salt)
 Each buyer and seller acts independently
 Buyers and sellers are both decently informed about
products and prices (buyers will know the lowest price
and sellers will try and meet that lowest price)
 Ease for buyers and sellers to enter into, conduct, and
get out of business
Number
of firms
in
Industry
Influence
over price
Product
differentiation
Advertising (nonprice
competiti
on)
Entry into Examples
market
Many
None
Limited
None
Easy
flea market
or swap
meet;
farmer’s
market
Monopoli Many
stic
competiti
on
Limited
Fair
amount
Fair
amount
Easy
Gas
Stations/
Women’s
clothing
Oligopoly Few
Some
Fair
amount
Some
Difficult
Automobil
es/Alumin
um
Pure
monopol
y
Extensive
None
None
Almost
Perfect:
Impossible None
Near: H2O
Perfect
competiti
on
One
Monopolistic Competition
 A type of competition within an industry where:
1. All firms produce similar yet not perfectly
substitutable products. (shoes, computers, bikes)
2. All firms are able to enter the industry if the profits
are attractive.
3. All firms are profit maximizers. MC=MR (Graph)
4. All firms have some market power, which means
none are price takers.
Number
of firms
in
Industry
Influence
over price
Product
differentiation
Advertising
Entry into Examples
market
Many
None
Limited
None
Easy
Perfect:
None
Near:
Monopoli Many
stic
competiti
on
Limited
Fair
amount
Fair
amount
Easy
Gas
Stations,
Women’s
clothing,
shoe co’s,
computers.
Oligopoly Few
Some
Fair
amount
Some
Difficult
Automobil
es, soft
drinks
Pure
monopol
y
Extensive
None
None
Almost
Perfect:
Impossible None
Near: H2O
Perfect
competiti
on
One
Oligopoly
 A situation in which a particular market is controlled
by a small group of firms. (soft drinks, fast food, cars,
cell phone companies)
An oligopoly is much like a monopoly, in which only
one company exerts control over most of a market. In
an oligopoly, there are at least two firms controlling
the market.
 Collusion
 Price-fixing
 Profit Maximizing
Number
of firms
in
Industry
Influence
over price
Product
differentiation
Advertising
Entry into Examples
market
Many
None
Limited
None
Easy
Perfect:
None
Near:
Monopoli Many
stic
competiti
on
Limited
Fair
amount
Fair
amount
Easy
Gas
Stations/
Women’s
clothing
Oligopoly Few
Some
Fair
amount
Some
Difficult
Automobil
es, soft
drinks
Pure
monopol
y
Extensive
None
None
Almost
Perfect:
Impossible None
Near: H2O
Perfect
competiti
on
One
Pure Monopoly
 A situation in which a single company or group owns
all or nearly all of the market for a given type of
product or service.
 By definition, a monopoly is characterized by an
absence of competition
 It often results in high prices and inferior products
Pure Monopoly
 Most believe that, with few exceptions, the free market
just doesn't work when there is only one provider of a
good or service.
 The reason: there is no incentive to improve a product
or meet the demands of consumers.
 Governments attempt to prevent monopolies from
arising through the use of antitrust laws.
Patents
 What about patents for new inventions?
 Patents give monopolies on a product for a set period
of time.
 The reasoning behind patents is to give innovators some
time to recoup what are often large research and
development costs. In theory, they are a way of using
monopolies to promote innovation.
Natural or Public Monopolies
 Monopolies are set up by governments to provide
essential services.
 Some believe that government should offer public
goods and services such as water, electricity, and
cable at a price affordable to everyone.
Number
of firms
in
Industry
Influence
over price
Product
differentiation
Advertising
Entry into Examples
market
Many
None
Limited
None
Easy
Perfect:
None
Near:
Monopoli Many
stic
competiti
on
Limited
Fair
amount
Fair
amount
Easy
Gas
Stations/
Women’s
clothing
Oligopoly Few
Some
Fair
amount
Some
Difficult
Automobil
es/Alumin
um
Pure
monopol
y
Extensive
None
None
Almost
Perfect:
Impossible water,
cable
Perfect
competiti
on
One