Overview
This lecture covers the main types of market structures—perfect competition, monopolistic competition, duopoly, oligopoly, and monopoly—focusing on their defining characteristics, efficiency, and impacts on welfare and profits.
Perfect Competition
- Complete knowledge and no barriers to entry exist.
- There are infinite firms with identical products.
- Firms are price takers and cannot influence the market price.
- Supernormal (above-normal) profits occur only in the short run.
- Long-run: only normal profits as new entrants drive prices down.
- Firms are allocatively efficient (resources match consumer desires) in both short and long run.
- Productive efficiency achieved only in the long run.
- Welfare is maximized due to lowest possible prices.
Monopolistic Competition
- Only partial, asymmetric knowledge with minor barriers to entry.
- Many independent firms with differentiated products.
- Firms are price makers and can set their own prices.
- Supernormal profits possible in the short run only.
- Long-run: new entrants erode supernormal profits; only normal profit remains.
- Neither allocative nor productive efficiency is achieved.
- Welfare loss occurs as price exceeds marginal cost.
Duopoly and Oligopoly
- Knowledge is partial and asymmetrical, with firms controlling information.
- Major barriers to entry limit the number of firms (few interdependent players).
- Products may be differentiated and firms sometimes collude.
- Price is sticky (does not change easily); supernormal profits likely.
- Not allocatively or productively efficient; welfare loss occurs.
- Oligopolists face elastic demand with price increase and inelastic demand with price drop.
- Profit maximization where marginal cost (MC) cuts marginal revenue (MR), profits depend on average total cost (ATC).
Monopoly
- Monopolists have asymmetric knowledge and control information.
- Major barriers to entry exist (limit pricing, vertical integration, key resources).
- Single firm as price maker; supernormal profits are likely.
- Not allocatively or productively efficient, causing welfare loss.
- Strong regulation or nationalization may occur to protect consumers, including price controls, taxes, and oversight by regulatory authorities.
Key Terms & Definitions
- Perfect Competition — Market with infinite firms selling identical products, no barriers, full knowledge.
- Monopolistic Competition — Market with many firms selling differentiated products and minor entry barriers.
- Oligopoly — Market with few interdependent firms and significant barriers to entry.
- Duopoly — Market with exactly two dominant firms.
- Monopoly — Market with a single firm controlling the industry.
- Allocative Efficiency — Resources allocated where consumer desires are met.
- Productive Efficiency — Production at the lowest possible cost.
- Supernormal Profit — Profit above the normal expected return.
Action Items / Next Steps
- Review characteristics and efficiency outcomes for each market structure.
- Prepare examples of real-world markets matching each structure.
- Read textbook chapter on market structures for deeper understanding.