A Spectrum of
Markets
4 Kinds of Markets

Pure or “Perfect” Competition

Monopolistic Competition

Oligopoly

Pure or Perfect Monopoly
4 Kinds of Markets

“Pure or perfect competition” and “pure
monopoly” represent opposite ends of the
spectrum of markets

“Monopolistic competition” and “oligopoly”
represent the actual conditions faced by
MOST firms.
Perfect Competition

Perfectly competitive markets are ones in which:
Uniform good and services are sold.
 Prices are generally known.
 There is competition in the market between buyers and
sellers.
 No group of buyers or sellers attempts to fix prices.
(supply and demand curves apply mainly to these markets)

Perfect Competition

An example would be the stock exchange.



If you wish to buy shares in a certain company,
one share of the common stock is the same as
the next.
Prices are generally known.
No one person or group of people controls the
prices.
Perfect Competition

Firms in perfectly competitive markets are
known as “price-takers” because they have
to accept the prevailing price.

Easy to enter this market

Perfect competition is rarely achieved.
Monopoly

A market situation where there is only one
producer of a good or service and many
buyers.

Very difficult if not impossible to enter this
market.
Monopoly

Kinds of monopolies:

Natural monopoly. Ex. Electrical service (it is
more efficient to have everyone plugged into one
system.

Legal monopolies. Ex. Public transit (when
government makes it illegal for more than one
company to supply a good or service.
Monopoly

Kinds of monopolies:

Combines or Cartels. When a group of
producers agree to limit competition by fixing
prices, limiting output or dividing the market
geographically among them. ILLEGAL
Monopoly

What is the problem?



Usually on products or services with inelastic
demand (ex. telephone or power company)
Inelastic demand + no competition among
producers = expensive, poor quality.
For this reason, governments regulate (monitor
quality and control prices) or own the monopoly
to protect the customer.
Oligopoly

A kind of market where a few firms supply
most of the goods and services.


Ex. Automobile makers, Oil companies, Cereal
makers
Difficult to enter this market.
Oligopoly

2 kinds of oligopoly

Homogeneous oligopoly. When products being
produced are virtually identical. Ex. Oil
companies.

Differentiated oligopoly. When companies strive
to make distinct products. Ex. Automobile
makers.
Oligopoly

Why do oligopolies exist?


Certain products require large-scale operations
for production.
Cooperation among Oligopolies.

If cooperation is low and competition high among
oligopolies, prices will be high.
Monopolistic Competition

A market situation in which there are many
sellers providing a similar but not identical
good or service. Ex. Fast food.

Easy to enter this industry.
Monopolistic Competition



Many suppliers
Products similar but not identical (which
gives supplier some individual control over
price).
Monopolistically competitive = firms
compete with each other, but each has a
monopoly on its particular product.