Market Structure

MARKET STRUCTURES
Market Number of Type of Control over Conditions

Producers Product Price of Entry
Pure Large Virtually None (“Price Very Easy
Competition identical Takers”)
Monopolistic Relatively Differentiated Limited Low Barriers
Competition Large (Easy)
Oligopoly Few (Less Identical or Limited or High
than 10) Differentiated Wide Barriers to
Entry (Hard)
Pure One Unique Wide (“Price Blocked
Monopoly Makers”)
• In pure competition, the firm’ demand curve is perfectly elastic

(horizontal). The firm can sell many goods it can produce at the
equilibrium price.
• In monopolistic competition, consumers go for a certain product
based on differentiation.
• In pure monopoly, the firm has no or very little market incentive
to innovate or control costs; hence, pure monopolies are usually
subject to government regulation.
• In monopsony, there is only one buyer for all sellers. A monopsonist
has monopoly power in the purchase of a resource. The marginal cost
curve for a monopsonist is different from other firms in that each
time it purchases an additional unit of product or labor it
increases the cost of all the resource.
PERFECT PURE COMPETITION

In this market, a firm will continue to produce and sell products
until the marginal cost is greater than marginal revenue. Theoretically,
no economic profits can be generated in the long run. The price will
reflect the cost plus the normal profit of the most efficient products.
In this market, there is no product differentiation and the key to
being successful is being the lowest cost producer in the marketplace.
Innovation is restricted to attempting to make production, distribution,
and sales processes more efficient.
Demand curve; Firm vs. Market
The firm’s demand curve is perfectly elastic (horizontal). The firm
can sell as many goods as it can produce at the equilibrium price but
no goods at a higher price. The firm is a price taker. The market demand
curve, on the other hand, is downwards sloping. Therefore, demand will
increase if all suppliers’ lower prices and will decrease if all
suppliers raise their prices.
MONOPOLISTIC COMPETITION
Monopolistic competition is characterized by many firms selling a
differentiated product or service. The differentiation may be real or
only created by advertising, and there is relatively easy entry to the
market but not as easy as in a perfectly competitive market. This type
is prevalent in retailing, including the markets for groceries,
detergents, and breakfast cereals.
Demand curve
The demand curve in a monopolistic market is negatively sloped and
firms tend to produce and sell products until the marginal revenue is
less than the average variable cost. Therefore, goods tend to be priced
somewhat higher than in a perfectly competitive market but less than in
a monopoly. Also, there tends to be unproduction as compared to a
perfectly competitive market.
Strategy in the market
They tend to focus on product or service innovation. Companies may
spend heavily on product development. Customer relations and advertising
necessarily are important to firm strategies.
OLIGOPOLY
The oligopoly model is much less specific than the other market
structures, but there are typically few firms in the industry. Thus, the
decisions of rival firms do not go unnoticed. Products can be either
differentiated or standardized. Prices tend to be rigid (sticky) because
of the interdependence among firms. Entry is difficult because of either
natural or created barriers. Price leadership is typical in oligopolistic
industries. Under price leadership, price changes are announced first
by a major firm. Once the industry leader has spoken, other firms in the
industry match the price charged by the leader. The mutual
interdependence of the firms influences both pricing and output
decisions.
Barriers to entry
This form of market is characterized by significant barriers to
entry. As a result, there are few (generally large) sellers of a product.
Since there are few sellers, the actions of one affect the others. An
example of an oligopoly is the automobile industry.
Control over price
Oligopolists often attempt to engage in non-price competition
(e.g., by product differentiation or providing high levels of service).
However, during economic downturns and periods of overcapacity, price
competition in an oligopolistic market can turn fierce.
Demand curve
The kinked-demand-curve model seeks to explain the price rigidity
in oligopolistic markets. This model holds that the demand curve is
kinked down at the market price because other oligopolists will not match
price increases but will match price decreases. Generally, in the
oligopolistic market there is a price leader that determines the pricing
policy for the other producers.
PURE MONOPOLY
A pure monopoly is a market in which there is a single seller of a
product or service for which there are no close substitutes. In pure
monopoly, the company has little market incentive to innovate or control
costs. The company has no market control on the price it charges. As a
result, pure monopolies are generally subject to government regulation.
Therefore, any advertising expenditures they incur tend to be for public
relations. These firms also spend a lot of effort attempting to influence
laws and regulations. They can increase total revenue if they can engage
in price discrimination by market segment.
Control over Price and Demand curve
The monopolist sets the price for the product (unless it is set by
regulation). The demand curve for the firm is negatively sloping; the
company must reduce price to sell more output. The firm will continue
to produce and sell products as long as the marginal revenue is greater
than average variable cost.
Barriers to entry
Entry barriers make it possible for the firm to make economic
profit in the long run.
Market Structure Analysis
The competitive market of the firm determines the intensity of
competition and threats to new entrants to the industry. However, the
firm must also consider the threat of substitute products, bargaining
power of suppliers, and bargaining power of its customers.
Michael E. Porter has developed a model of structure of industries
and competition. It includes an analysis of the five competitive forces
that determine long-term profitability measured by long-term return on
investment. This analysis results in an evaluation of the attractiveness
of an industry. The five forces are (1) the degree of rivalry among
existing firms; (2) threats of, and barriers to, entry; (3) the threat
of substitute products and services; (4) the threat of buyers’ bargaining
power; and (5) the threat of suppliers’ bargaining power.
• Threat of substitute products. Substitute products are goods or

services from outside a given industry that perform similar
functions. All products that can replace a good or service should
be considered substitutes. However, because substitutes are types
(not brands) of goods and services that have same purposes, brand
identity is not a structural consideration affecting the threat
of substitutes.
• Bargaining power of suppliers.
o The power of suppliers affects a firm’s ability to negotiate
price or quality concessions. When suppliers have a good
deal or power, they will be able to increase prices, and the
firm purchasing those supplies may or may not be able to
pass the cost on to its customers. For example, suppliers
have power when the market is dominated by a few large
companies, the industry firms are not significant customers
for suppliers, or there are large costs to switching to
another supplier.
o The supplier market also includes the firm’s labor market.
The firm’s ability to influence wage rate will depend on the
other firms that are competing for the labor, and actions of
the government and labor unions.
• Bargaining power of customers. The power of customers determines
the firm’s ability to increase prices or lower quality of their
products. When customers are powerful, the firm has difficulty
passing cost increase to them. Therefore, the firm must
concentrate on controlling costs. Customers are powerful, for
example, when they purchase a large percentage of the industry
output, they could switch to another product with little cost,
the industry’s products are standardized, and the customers pose
a threat to integrate backward into firm’s market.
Note, however, that a strong brand identity decreases the threat
that new competitors will enter an industry. New competitors have
difficulty because potential customers are loyal to established firms
in the industry.
Entry/Exit Barriers
The most favorable condition for the attractiveness of an industry
is the existence of high entry barriers and low exit barriers. When the
threat of new entrants is minimal and exit is not difficult, returns are
high, and risk is reduced in the event of poor performance. Low entry
barriers keep long-term profitability low because new firms can enter
the industry, increasing competition and lowering prices and the market
shares of existing firms. Exit barriers are reasons for a firm to remain
in an industry despite poor (or negative) profits.

Market Structure

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MARKET STRUCTURES

Market Number of Type of Control over Conditions

• In pure competition, the firm’ demand curve is perfectly elastic

PERFECT PURE COMPETITION

• Threat of substitute products. Substitute products are goods or

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