[Music] market structure is a spectrum at what extreme is perfect competition in which many firms produce identical products and competition forces them all to sell the market price at the other extreme we have monopoly where only one firm is producing the product in between we have monopolistic competition where there are many sellers and differentiated products and oligopoly where a few firms compete in a variety of ways where an industry falls along this spectrum can be determined by examining five characteristics of the industry the number of sellers and their relative sizes barriers to entry or exit from the industry the degree to which firms differentiate their products the nature of competition and the pricing power of the firms let's examine the characteristics of each of these market structures and the implications for firm strategy perfect competition refers to a market in which many firms produce identical products barriers to entry into the market are very low and firms compete for sales only on the basis of price firms face perfectly elastic demand curves at the price determined in the market because no firm is large enough to affect the market price perfect competition is just in theory though some industries come close to it the wheat production industry in a region is a good approximation where there is hardly any differences in the products wheat producers tend to price according to overall market supply and demand monopolistic competition also has many competing firms and low barriers to entry but differs from perfect competition in that the products are differentiated such differentiation can be in product quality product features and marketing the firms compete not just in price but also in product differentiation the demand curve faced by each firm is elastic but downward sloping firms may have limited pricing power because of perceived differences among competing products the market for shampoo is a good example of monopolistic competition firms differentiate through features and marketing with claims like more attractive hair anti-dandruff and anti-hair loss features as such features can have perceived value in some consumers the shampoo manufacturers are able to price according to the demand for their products this is why firm demand is downward sloping the most important characteristic of an oligopoly market is that there are only a few firms competing barriers to entry are high often because economies of scale in production or marketing lead to very large firms while products are typically good substitutes for each other they may be either quite similar or differentiated through features branding marketing and quality one unique characteristic of an oligopoly is that each firm must consider the strategies and actions of other firms in setting its own price and differentiation strategy we say that such firms are interdependent demand is also downward sloping but can vary in elasticity in general firms that are very differentiated products tend to have more elastic demand than firms with less differentiation the telco industry is a good example of an oligopoly with less differentiated firms the basic services that they provide are quite similar so they have limited pricing power on the other hand the automobile market is an oligopoly in which the firms differentiate themselves on features quality branding and marketing such car makers have significant pricing power resulting in more inelastic demand and greater variance in car prices and lastly a monopoly market is characterized by a single seller of a product with no close substitutes thereby little competition this fact alone means that the firm faces a downward sloping demand curve which is the market demand curve and has the power to choose the price at which it sells its product there can be a few reasons for monopolies firstly very high barriers to entry protect a monopoly producer from competition copyrights and patents also protect a monopoly from competition another possible source of monopoly power is control over a resource specifically needed to produce the product most frequently monopoly power is supported by government in such cases the price the monopoly charges is often regulated by the government as well the most common example of a regulated monopoly is the local electrical power provider in most cases the monopoly power provider is allowed to earn a normal return on its investment and prices are set by the regulatory authority to allow that return and here's a summary of the types of market structure that we've just discussed you're watching an excerpt from our comprehensive animation library for more videos like these head on down to prepnuggers.com prep nuggets let us do the hard work for you