Four Market Structures
Pure Competition
Market Structure Continuum
Four Market Structures
Pure Monopoly
Pure
Competition
Market Structure Continuum
Four Market Structures
Monopolistic Competition
Pure
Competition
Monopolistic
Competition
Market Structure Continuum
Pure
Monopoly
Four Market Structures
Oligopoly
Pure
Competition
Monopolistic
Competition
Market Structure Continuum
Pure
Monopoly
Four Market Structures
Pure
Competition
Monopolistic
Competition
Oligopoly
Market Structure Continuum
Pure
Monopoly
Characteristics of Pure
Competition
•
•
•
•
very large numbers
standardized product
price-takers
easy entry & exit
Pure
Competition
Monopolistic
Competition
Oligopoly
Market Structure Continuum
Pure
Monopoly
Pure Monopoly
Characteristics:
• Single seller
• No close substitutes
• Price-maker
• Blocked entry
Pure Monopoly
• Examples
– public utilities
Pure Monopoly
• Examples
– public utilities
– professional sports teams (Maple Leafs)
Barriers to Entry
• Economies of Scale (Microsoft, aircraft)
• Legal Barriers to Entry: Patents (drugs)&
Licenses (CRTC)
• Ownership or Control of Essential
Resources
• Pricing & Other Strategic Barriers to Entry
Monopolistic Competition
& Oligopoly
Four Market Structures
Monopolistic Competition
Pure
Competition
Monopolistic
Competition
Market Structure Continuum
Pure
Monopoly
Characteristics of Monopolistic
Competition
• Relatively Large Number of Sellers
– Small Market Shares
– No Collusion
– Independent Actions (little interdependence)
Characteristics of Monopolistic
Competition
• Differentiated Products
– product attributes (physical, qualitative)
– service
– location (small convenience stores)
– brand names & packaging (Bayer vs. Anacin)
– some control over price
Characteristics of Monopolistic
Competition
•
•
•
•
Relatively Large Number of Sellers
Differentiated Products
Easy Entry & Exit
Advertising
Four Market Structures
Oligopoly
Pure
Competition
Monopolistic
Competition
Oligopoly
Market Structure Continuum
Pure
Monopoly
The Characteristics of Oligopoly
• A Few Large Producers
• Homogeneous or Differentiated Products
• Control Over Price, but Mutual
Interdependence
• Entry Barriers
– economies of scale
– high capital costs
– ownership of raw materials
• Mergers
ECONOMICS IN ACTION
 And, according to affidavits submitted to a Canadian court, top
executives at Hershey, Mars, and Nestle met secretly in coffee shops, in
restaurants, and at conventions to set prices.
The Prisoners’ Dilemma
 When the decisions of two or more firms significantly affect each others’
profits, they are in a situation of interdependence.
 The study of behavior in situations of interdependence is known as
game theory.
 The reward received by a player in a game—such as the profit earned by
an oligopolist—is that player’s payoff.
• A payoff matrix shows how the payoff to each of the participants in a
two-player game depends on the actions of both. Such a matrix helps us
analyze interdependence.
18
The Prisoners’ Dilemma
Louise
Don’t confess
Louise gets 5-year
sentence.
Confess
Louise gets 2-year
sentence.
Don’t
confess
Thelma
Thelma gets 5-year
sentence.
Louise gets 20-year
sentence.
Thelma gets 20-year
sentence.
Louise gets 15-year
sentence.
Confess
Thelma gets 2-year
sentence.
Thelma gets 15-year
sentence.
19
Four Market Models
Characteristics of the Four Basic Market Models
Pure
Characteristic Competition
Monopolistic
Competition
Oligopoly
Monopoly
Number of firms
A very large
number
Many
Few
One
Type of product
Standardized
Differentiated
Standardized or
differentiated
Unique; no
close subs.
Control over
price
None
Some, but within rather
narrow limits
Limited by mutual
inter-dependence;
considerable with
collusion
Considerable
Conditions of
entry
Very easy, no
obstacles
Relatively easy
Significant
obstacles
Blocked
Nonprice
Competition
None
Considerable emphasis
on advertising, brand
names, trademarks
Typically a great
deal, particularly
with product
differentiation
Mostly public
relation
advertising
Examples
Agriculture
Retail trade, dresses,
shoes
Steel, auto, farm
implements
Local utilities
LO1
8-20