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Chapter 7: The Market Structure
Transcript of Chapter 7: The Market Structure
Types of Market Structure Perfect, or pure, competition is a market structure characterized by (1) a large number of small firms, (2) homogeneous product, and (3) very easy entry or exit from the market.
Large number of small firms
One of the characteristics of a perfectly competitive market is that it is composed of many firms and buyers, that is, a large number of independently-acting firms and buyers, each firm and buyer being sufficiently small to be unable to influence the price of product transacted in the market.
In a perfectly competitive market, the product offered by the competing firms are identical not only in physical attributes but are also regarded as identical by buyers who have no preference between the products of various producers. In other words, all firms produce a standardized or homogenous product.
Very easy entry and exit
This means that there are no barriers to entry or impediments to the exit of existing sellers. That is, new firms face no barriers to entry. Barriers can be in the form of financial, technical, or government imposed barriers such as licenses, patents, permits, copyrights, etc.
However, in the real world, no market exactly fits the three assumptions of perfect competition. The perfectly competitive market structure is only a theoretical or ideal model, but some actual markets do approximate the model fairly closely. Typical example of this type of market structure is the agriculture sector or farm products markets. Perfect Competition Monopoly Monopoly is the opposite extreme of perfect competition. Under monopoly, the consumer has only two choices – either buy the monopolist’s product or none at all. Monopoly is a market structure characterized by (1) a single seller or producer, (2) a unique product, and (3) impossible entry into the market. Unlike perfect competition, there are no close substitutes for the monopolist’s product.
Single seller or producer
A monopoly market is comprised of a single supplier selling to a multitude of small, independently-acting buyers. In other words, a monopoly means that a single firm is the industry. One firm provides the total supply of a product in a given market.
A unique product means that there are no close substitutes for the monopolist’s product. As such, the monopolist faces little or no competition. In reality, however, there are few, if any, products that have no close substitutes.
Barriers to entry are so severe in a monopoly so that it is impossible for new firms to enter the market. In other words, extremely high barriers make it very difficult or impossible new firms to enter an industry. Barriers to entry include (1) sole ownership of a vital resource, (2) legal barriers like government franchises and licenses, and (3) economies of scale.
Market Structure Monopolistic competition is a type of market structure characterized by (1) many small firms, (2) differentiated products, and (3) easy market entry and exit.
Monopolistic Competition Many small sellers
Monopolistically competitive market is comprised of a large number of independently-acting firms and buyers. However, under monopolistic competition, just like under perfect competition, the exact number of firms cannot be determined. We can say therefore that the many-sellers condition is met when each firm is so small relative to the total market that its pricing decisions have a negligible effect on the market price.
The products offered by competing firms under a monopolistically competitive market are differentiated from each other in one or more respects. In fact, this is the key feature of monopolistic competition.
Product differentiation is the process of creating real or apparent differences between goods and services sold in the market. A differentiated product has close, but not perfect, substitutes. It can be real or imagined. It does not matter which is true so long as consumers believe such differences exist. Easy entry and exit
In a monopolistically competitive market, there are no barriers to entry preventing new firms entering the market or obstacles in the way of existing firms leaving the market. Thus, unlike a monopoly, firms in a monopolistically competitive market face low barriers to entry. However, entry into a monopolistically competitive market is not quite as easy as entry into a perfectly competitive market. Because it sell differentiated products, it somewhat difficult for new firms to become established.
Oligopoly is a market structure characterized by (1) few sellers (2) either a homogeneous or a differentiated product, and (3) difficult market entry. Oligopoly, just like monopolistic competition, is found in real world industries.
Oligopoly Few sellers
Under oligopoly, the bulk of market supply is in the hands of a relatively few large firms who sell to many small buyers. We can therefore say that oligopoly is competition ‘among few’.
Homogeneous or differentiated products
In a oligopolistic market, the products offered by suppliers may be identical or, more commonly, differentiated from each other in one or more respects. These differences may be of a physical nature, involving functional features, or may be purely ‘imaginary’ in the sense that artificial differences are created through advertising and sales promotion.
Similar to monopoly, there are formidable barriers of entry which make it difficult for new firms to enter the market. High barriers to entry in an oligopoly protect firms new entrants. These barriers include exclusive financial requirements, control over essential resources, patent rights, and other legal barriers. But the most significant barriers to entry in an oligopoly market is economies of scale.
Special Types of
Market Structure Bilateral monopoly is a market situation comprising one seller (like monopoly) and only one buyer (like monopsony). Bilateral oligopoly is a market condition with a significant degree of seller concentration (like oligopoly) and a significant degree of seller concentration (oligopsony). Duopsony is a market situation in which there are only two buyers but many sellers.
Duopoly is a subset of oligopoly describing a market situation in which there are only two suppliers. Monopsony is a form of buyer concentration, that is, a market situation in which a single buyer confronts many small suppliers.
Chapter 7: The Market Structures end of chapter 7...