Market Structure

The nature and degree of competition between firms operating in the same

industry.

STORE

(LOCATION OF BUSINESS)

INDUSTRY (TYPE OF BUSINESS)

FIRM

(NAME OF BUSINESS)

FIRM

(NAME OF BUSINESS)

FIRM

(NAME OF BUSINESS)

STORE

(LOCATION OF BUSINESS)

STORE

(LOCATION OF BUSINESS)

STORE

(LOCATION OF BUSINESS)

•Different business types face different amounts of competitionThe level of competition can be described by placing businesses types along a spectrum.

Most competition Least competition

Pure competition Monopolistic Competition Oligolopoly Monopoly

Perfect Competition

Or Pure Competition

Characteristics of Perfect Competition

A large number of buyers and sellers (Individual firms have no influence over price)

Firms are selling identical products (Buyers won’t care who they buy from)

Buyers and sellers are knowledgeable about the product’s price (A change in price will immediately change the amounts demanded and supplied)

Firms can easily go into and get out of business (no barriers).

Examples of Perfect Competition

–Commodities • Natural gas, oil or coal

• Grains

• Produce (fruits and vegetables)

• Livestock

Monopolistic Competition

Characteristics of

Monopolistic Competition

Large number of buyers and sellers (Most firms are small)

Similar, not identical, product (Substitutable goods between firms are differentiated)

It is easy to get into and out of this industry (Start-up costs are low)

Firms can raise prices (You can charge a higher price for a differentiated product)

Non-Price Competition

Or Product DifferentiationFirms may: Make their product with an extra or new

feature Advertise heavily for name or product

recognition Choose a special location Provide a higher level of service

Oligopoly

Characterisitics of Oligopoly: A few very large firms dominate this

industry There are many barriers to entry

– Cost advantages (large start-up costs or economies of scale)

– Legal barriers (patents & licenses)– Non-price competition (advertising)– Illegal barriers (collusion)

Pricing decisions by one firm affect all other firms (price leadership)

Price wars, price fixing, collusion & cartels common

Monopoly

Characteristics of Monopolies:

There is only one seller of the product (there must be no substitutes)

The seller has control over price (unless it is a regulated monopoly), but must take demand into account

There has to be extreme barriers to entry

BARRIERS TO ENTRY Obtain a natural monopoly Control all natural resources needed to

make the product Use non-competitive practices (threats/

bribes) Limited demand

Government gives a company the exclusive right to provide goods or services within an area because the costs to consumers are lowered by having a single firm provide them (ex. AMUD, Charter Cable).

Four Types of Monopolies:Natural

Geographic Monopolies

There are no other businesses in the immediate area to offer any competition due to low demand or extreme isolation (ex. Driftwood in Granbury).

Technological MonopoliesA firm or industry has created a new

product or process and obtains a patent or copyright.(ex. Polaroid or pharmaceutical firms)

Government Monopolies

A government owned business that provides a product or service that private firms do not adequately provide (ex. US Post Office or Amtrak).