THE FOUR MARKET STRUCTURES
Market Pure Monopolistic Oligopoly Pure Characteristic Competition Competition Monopoly 1. Number of Very Many Many Few One Sellers 2. Number of Very Many Very Many Very Many Very Many Buyers 3. Type of Identical Limited Significant Unique Product Differences Differences 4. Entry Very Easy Easy Difficult Blocked Conditions 5. Seller None Some A Whole Lot Awesome Market Power (Price Taker) (Price Maker) 6. LR Adjustment Yes Yes Limited No Process 7. LR Economic No No Some Yes Profits 8. LR Technical Yes Close Possible Possible Efficiency 9. LR Allocative Yes Close No No Efficiency 10. Firm Demand Curve -----------------------------------
1. Homogeneous and Differentiated Products. The identical products produced under Pure Competition are often called homogenous products. Most homogeneous products are intermediate goods such as graded commodities (wheat, eggs, mineral ores) or standardized products (metal rods and bars, nails, bolts, screws). The different types of products produced under Monopolistic Competition and Oligopoly are often called differentiated products. These are usually final goods and services which are branded products, such as a Ford automobile, Coca-Cola soft drink, or WalMart Stores.
2. Concentration Problem. Over time, markets tend to begin as highly competitive but evolve into highly concentrated oligopolies (two or three sellers) or into a monopoly. This is referred to as the industry life cycle. New industries will form around new products and/or new production technologies. In the beginning, there are many suppliers -- small, no market power, price takers. Over time, the industry will grow and the most successful firms will emerge to dominate the industry. Ultimately, the industry could come under the sway of a single firm. This is referred to as the concentration problem or monopoly problem. In the late 1800s, as the industries in Europe and North America became more highly concentrated, governments developed different approaches to the situation.
a) Government ownership and control -- Socialism (England, France)
b) Private ownership and government control -- Fascism (Cartels in Germany)
c) Private ownership and control with government maintained competition -- Antitrust (United States)
3. Allocative Efficiency Range. The location of the supply curve in an industry will depend upon the structure of the industry. In the diagram below there is a single demand curve in the industry marked by a capital D. If the industry has a competitive supply structure, the supply curve will be PC and equilibrium price and quantity will be Pc and Qc. Note this is the maximum output and lowest price of any industry structure and represents the highest level of allocative efficiency. If the industry has a monopoly supply structure, the supply curve will be PM and equilibrium price and quantity will be Pm and Qm. Note this is the highest price and lowest output of any industry structure, and is the poorest level of allocative efficiency. An oligopoly supply structure is represented by OL and a monopolistic competition supply structure is represented by MC.
4. Firm and Market Demand Curves. In the discussion below, the industry demand curve is graphed on the right and is marked with a capital D. The firm demand curve is graphed on the left and is marked with a lower case d. Remember, the firm demand curve is also the average revenue curve for the firm.
The firm is a small player in the market and is a price taker. In the diagrams, the market supply is 1000 units and the firm supplies only 10 units. This would infer that the industry is composed of about 100 small firms of roughly identical size. As a price taker, the firm has no "competitors" or "competition", there is just the "market". The "firm" in the diagram can be called an average firm, a typical firm, or a representative firm.
The firm is essentially a price taker, but it does have some limited control over its market price. The source of the limited market power is usually due to some local advantage such as location or a personal relationship with customers. There are "competitors" or the "competition" in the abstract -- a "them" versus "us" view of the marketplace. Again, the firm in the diagram is an average firm, and supplies about 20 units of an industry supply of 1000 units.
There are only a few firms in an oligopoly model, and they are locked in a market dance with each other. With a limited number of suppliers, the buyers are very aware of the identity of the seller. If the firms are producing final goods and services to sell to consumers, their products are usually branded and intensively advertised. Each firm has a strong sense of specific competitors -- Ford and General Motors, Compaq and Dell, Coca Cola and Pepsi Cola, Boeing and Airbus. Despite strong brand identifications, firms are still restricted in their price decisions. In the "kinked demand model" shown, any firm raising prices will lose market share to competitors who do not follow suite. Any reduction in prices will be matched by competitors (a "price war") which will prevent any market share gains. The general pricing structure of an oligopoly will be determined by a dominant firm or a low-cost firm. The long run pattern is stable prices and market shares, punctuated by periods of intense competition.
There is a single firm (or secondary competitors are small and inconsequential). The demand curve for the industry D is also the demand curve for the monopoly firm d. We cannot speak of an "industry" separate from the monopoly firm.