Competition and Market Structures

In the context of markets, competition
refers to the situation when producers
would each like to sell their goods or
services to the same customers.
 The great benefit of competition is that
when producers compete, they must seek
to entice the consumer with a lower price
or more desirable quality.
 Thus, competition creates incentives to find
ways to produce at lower cost, to invent
desirable variations on existing products
and to discover new products.
Market structure refers to the ways that
competition occurs, based on the
number of firms, the similarity of the
products being sold and the ease of
entry for new firms or exit for existing
firms. Firms make different decisions
about the quantities to produce and
prices to charge depending on the
market structure of their industry.
There are four main market structuresperfectly competitive, monopoly,
oligopoly, and monopolistic competition.
 Barriers to entry are factors that make it
difficult for new firms (companies) to
enter the market (ex. Start up costs and
Perfect/pure competition describes a
market with many buyers and sellers of
the same (identical) good.
 There are no barriers to entry and exit.
 There are many firms.
 No control over prices.
 Examples- wheat, socks, salt, nuts and
Monopolistic Competition is a market in
which there are many companies that
sell similar but not identical products.
 There are many firms.
 They have little control over prices.
 They use nonprice competition,
competition through means other than
price, to compete (ex. Advertising).
 There are low barriers to entry.
 Examples include jeans and ice cream.
Market dominated by a few large firms.
Some variety in goods.
Some control over prices
High barriers to entry.
Examples-car companies, movie studios,
airlines, soda companies and cereal.
Oligopolistic firms sometimes use illegal
practices to set prices or reduce
competition. This collusion, price fixing, is an
agreement among firms to sell at the same
or similar prices. The US govt. assesses heavy
penalties for collusion.
A firm has a monopoly when it controls
an entire market. Hence, there is only
one company that sells the
 No variety of goods.
 Complete barrier to entry/exit.
 Complete control over prices.
Natural monopolies occur when the
market runs most efficiently with one
seller of a good/service.
 Geographic monopoly occurs when
there is only one firm that offers a good
or service in a particular area.
 Government monopolies provide
goods/services for people through a
government agency.
 The government can grant monopoly
power by issuing a patent or license.