MARKET STRUCTURES

Unit 7

Market Models

• Pure Competition• Monopolistic Competition• Oligopoly• Pure Monopoly

PURE COMPETITION

• In a purely competitive market, there are large numbers of firms producing a standardized product.

• Market prices are determined by consumer demand; no supplier has any influence over the market price, and thus, the suppliers are often referred to as price takers.

• The primary reason why there are many firms is because there is a low barrier of entry into the business.

• The best examples of a purely competitive market are agricultural products, such as corn, wheat, and soybeans.

MONOPOLISTIC COMPETITION

• Monopolistic competition is much like pure competition in that there are many suppliers and the barriers to entry are rather low.

• However, the suppliers try to achieve some price advantages by differentiating their products from other similar products.

• Most consumer goods, such as health and beauty aids, fall into this category.

• Suppliers try to differentiate their product as being better so that they can justify higher prices or to have a larger market share than the competition.

• Monopolistic competition is only possible, however, when the differentiation is significant or if the suppliers are able to convince consumers that they are significant by using advertising or other methods that would convince consumers of a product's superiority.

• For instance, suppliers of toothpaste may try to convince the public that their product makes teeth whiter or helps to prevent cavities or periodontal disease.

OLIGOPOLY

• An oligopoly is a market dominated by a few suppliers.• A high barrier to entry limits the number of suppliers

that can compete in the market, so the oligopolistic firms have considerable influence over the market price of their product.

• However, they must always consider the actions of the other firms in the market when changing prices, because they are certain to respond in a way to neutralize any changes so that they can maintain their market share.

• Auto manufacturers are a good example of an oligopoly, because the fixed costs of automobile manufacturing are very high, thus limiting the number of firms that can enter into the market.

• A pure monopoly has pricing power within the market. There is only one supplier who has significant market power and determines the price of its product.

• A pure monopoly faces little competition because of high barriers to entry, such as high initial costs, or because the company has acquired significant market influence through network effects, for instance.

• One of the best examples of a pure monopoly is the production of operating systems by Microsoft. Because many computer users have standardized on software products that are compatible with Microsoft's Windows operating system, most of the market is effectively locked in, because the cost of using a different operating system, both in terms of acquiring new software that will be compatible with the new operating system and because the learning curve for new software is steep, people are willing to pay Microsoft's high prices for Windows.

Carlos Slim Helu (Honorary Chairman,

América Móvil)

“Competition makes you better, always, always makes you better, even

if the competitor wins.” — “Questions and Answers,” Carlosslim.com, 2007.