Market Structures in Economics

Introduction to Market Structures

• Market Structure: Also known as industrial organization, it refers to how firms in a particular industry are organized.
• The four major market structures include:
  • Perfect Competition
  • Monopolistic Competition
  • Oligopoly
  • Monopoly

Comparison of Market Structures

Types of Products

• Perfect Competition: Identical products; e.g., Avocado industry.
• Monopolistic Competition: Differentiated products; e.g., Toy industry.
• Oligopoly: Can have both identical and differentiated products; e.g., Cellular service (identical) vs. Video game consoles (differentiated).
• Monopoly: No competition to compare with.

Number of Firms

• Perfect Competition and Monopolistic Competition: Many firms; e.g., Many avocado farms and toy manufacturers.
• Oligopoly: Few firms; e.g., Cellular service providers, gaming consoles.
• Monopoly: One firm dominates; e.g., An electric company.

Barriers to Entry

• Perfect Competition & Monopolistic Competition: Low barriers to entry.
• Oligopoly: High barriers to entry.
• Monopoly: Very high barriers to entry.

Economic Consequences of Market Structures

Pricing and Efficiency

• Perfect Competition: Price = Marginal cost; no deadweight loss.
• Monopolistic Competition: Price > Marginal cost; some deadweight loss.
• Oligopoly: Higher prices than monopolistic competition; more inefficiency and deadweight loss.
• Monopoly: Highest prices; most deadweight loss.

Competition Models

• Bertrand Model: Applicable to oligopolies and monopolistic competition to drive prices to marginal cost.
• Price Discrimination: Used to increase efficiency in various market structures.

Profitability

• Perfect and Monopolistic Competition: Zero economic profits in the long run due to competition.
• Oligopolies and Monopolies: Positive economic profits due to barriers to entry.

Market Concentration

Market Concentration Measures

• Herfindahl-Hirschman Index (HHI): Measures market concentration using square of market share.

Example

• Disney's acquisition of 20th Century Fox changed the film industry market concentration.
• Market share in 2019:
  • Disney: 21%
  • Warner Brothers: 19.6%
  • Sony Pictures: 15.7%
  • Fox: 15%
  • Universal: 14.8%
  • Paramount Pictures: 13.9%
• Calculation of HHI:
  • Original HHI: 0.17089 (points to perfect or monopolistic competition).
  • New HHI after acquisition: 0.23389 (classifies as oligopoly).

Interpretation of HHI

• Below 0.2: Competitive

• 0.2 to 0.6: Oligopoly

• Above 0.6: Dominated by a single firm

• HHI helps differentiate between market structures and assess competition intensity.