Overview
This lecture explains the spectrum of market structures, from perfect competition to monopoly, and outlines their defining characteristics and implications for firm strategy.
The Spectrum of Market Structures
- Market structures form a spectrum: perfect competition, monopolistic competition, oligopoly, and monopoly.
- Five industry characteristics determine market structure: number of sellers, barriers to entry/exit, product differentiation, competition nature, and pricing power.
Perfect Competition
- Many firms produce identical products with very low barriers to entry.
- Firms compete solely on price and have no control over the market price.
- Firms face perfectly elastic demand; wheat production is a real-world example.
Monopolistic Competition
- Many firms with low entry barriers, but products are differentiated by quality, features, or marketing.
- Firms compete on product differentiation and price.
- Demand curve for each firm is elastic but downward sloping, offering limited pricing power (e.g., shampoo market).
Oligopoly
- A few large firms dominate, with high barriers to entry (often due to economies of scale).
- Products can be similar or differentiated; firms are interdependent in strategy and pricing.
- Demand is downward sloping and can be more elastic with greater product differentiation (e.g., telecom and auto industries).
Monopoly
- One firm supplies the entire market with no close substitutes and very high barriers to entry.
- The monopolist faces the entire market demand curve and sets its own price.
- Causes of monopoly include government regulation, copyrights, patents, or exclusive resource control (e.g., local electricity provider).
Key Terms & Definitions
- Perfect Competition — Many firms selling identical products; no single firm can affect the price.
- Monopolistic Competition — Many firms sell differentiated products and compete on features as well as price.
- Oligopoly — Few large firms dominate the market and are interdependent in their pricing and output decisions.
- Monopoly — A single firm controls the market, setting prices due to lack of competition.
- Barriers to Entry — Obstacles that prevent new firms from entering an industry.
- Elastic Demand — Demand that changes significantly when price changes.
- Inelastic Demand — Demand that changes little when price changes.
Action Items / Next Steps
- Review the main characteristics and examples of each market structure.
- Prepare to compare and contrast these market structures for upcoming assessments.