Market Structures Overview

Other Market Structures

• Firms, producers, suppliers, owners, and managers are used interchangeably.
• Perfect competition is an ideal market interaction type where free entry/exit controls self-interest, promoting public interest.
• Monopoly is the opposite extreme, with no free entry/exit, limited information, and inefficient resource allocation.
• Real world markets often fall between these extremes, exhibiting different levels of interaction and barriers to entry/exit.
• Market structure impacts the degree of self-interest exhibited by participants.

Market Structures Table

• Market Structure | Number of Firms | Type of Entry and Exit | Nature of Products | Elasticity of Demand
• --|---|---|---|---
• Perfect Competition | Large | Free | Homogenous | Perfectly Elastic
• Monopolistic Competition | Large | Free | Differentiated | Elastic
• Oligopoly | Small | Restricted | Differentiated | Elastic, Inelastic
• Cartel | Small or Large | No | Homogenous | Elastic, Inelastic
• Monopoly | One | No | Homogenous | Elastic, Inelastic

Monopolistic Competition

• Free entry and exit in the long run, but not in the short run.
• Many firms exist.
• Firms produce differentiated products.
• Firms have some control over their prices in the short run due to their differentiated products.
• Short run demand curve is relatively elastic, and becomes very elastic in the long run.
• Firms strive to create a loyal customer base through advertising to differentiate their products and shift their demand curves.

Oligopoly

• Few firms.
• Firms have restricted entry.
• Firms may produce homogenous or differentiated products.
• Firms often engage in strategic behavior (e.g., agreeing on prices, dividing markets).
• Example of firms in an oligopolistic market include manufacturers of cars.

Cartel

• A special type of oligopoly.
• Firms cooperate to act like a monopoly.
• Usually few firms in the cartels and it's easy for them to agree on prices to maximize profit.
• They often divide the market geographically, allowing each member to set prices and maximize profit in their assigned region

Monopolistic Competition - Short Run Equilibrium

• Firms aim to maximize economic profits.
• Firms choose quantity and price based on perceived demand and marginal cost.
• In short-run equilibrium, output is where marginal revenue (MR) equals marginal cost (MC).
• Price is set above average total cost.

Monopolistic Competition - Long Run Equilibrium

• Free entry and exit drive economic profit to zero in the long run.
• Firms operate where the price is equal to the average total cost.
• This results in normal profit.

Advertising and Product Differentiation

• Firms differentiate their products using trademarks, branding, advertising and technological advancements.
• This creates a core of loyal customers and enables firms to raise prices and increase demand.

Natural Oligopoly

• High economies of scale.
• Only a few, large firms can efficiently serve the market, making entry difficult.
• Example areas in this market are industries where large, fixed-cost capital is required to produce, transportation, electricity.