Now, cost curves are always going to look the same, but other elements, like price,
revenue, and demand, will differ depending on the market structure that the business
operates in.
Are there other lots of producers, or only a few?
Is my product just like everyone else’s, or is it unique?
The characteristics of a market will clue you in as to the type of market structure
you're dealing with.
Really there is a continuum of market structures.
Let's take a look.
At one extreme, we have perfect competition.
Well, if it's competitive, how many producers are we talking about?
A lot.
How many is “a lot,” or “a large number”?
Economists aren’t really specific about this, but a large number of producers means
that there are so many competitors that each one is too small to affect the market.
In my mind, I tend to think of maybe 100 or more, so that each competitor has 1% or less
of the market.
Since nothing you do affects the market, no one really cares what you do, and you are
free to make decisions without worrying about how the competition will react.
How else can recognize a perfectly competitive market?
Besides having a large number of sellers, each of those sellers will be producing exactly
the same thing.
In perfect competition, the product is identical -- or homogeneous, or non-differentiated -- no
matter who produces it.
One more characteristic: it’s easy for firms to come and go from the industry; that is,
there is free entry and exit.
Think about it.
This industry has lots of producers.
Why?
Because it's easy to get in and set up shop.
In an industry like this -- lots of producers, all producing exactly that the same thing
-- how much market power (where market power is defined as the ability to control the price)
does an individual firm have?
None.
You have no ability to drive the price, because 1) you're so small, and 2) everyone else produces
exactly what you do.
TIME TO THINK: what would happen if you tried to raise your price?
Now let's take a look at the opposite extreme of the market structure spectrum.
Instead of a huge number of producers, there's only one producer for the whole market, or
a monopoly (the prefix “mono” meaning “one”).
Furthermore, the monopolist’s product is unique; there really are no substitutes for
this product.
Lastly, in a monopolistic industry, entry by other firms it nearly impossible due to
the extremely high barriers to entry.
We’ll get into this more later, but a barrier to entry could be really high costs, or legal
protection like patents or copyrights.
Given all of these characteristics -- only one producer, a unique product, and no one
else can get into the industry to compete with you -- how much market power (ability
to control price) does the monopoly producer have?
The monopolist has complete control over the price, within the boundaries of what consumers
are willing to pay.
Are there other structures?
Sure -- in fact, most real-world industries will fall somewhere in the middle ground,
not at the theoretical extremes of perfect competition or monopoly.
Two of these midrange structures are monopolistic competition and oligopoly.
A monopolistically competitive structure is still competitive, so there are still a lot
of producers; given there are lots of producers, we can assume that entry into the industry
is easy.
Unlike perfect competition, however, the products are not exactly the same.
Highly similar, yes; highly substitutable, yes; but not identical.
Think about, oh, toothbrushes.
You go to the store, and there are toothbrushes with square heads, diamond heads, rubber-grip
handles, bi-level bristles, toothbrushes that play music, toothbrushes that glow in the
dark, even with color indicators that tell you when to buy a new toothbrush.
All toothbrushes, all highly similar and highly substitutable, but with slight differences.
If I believe, as a consumer, that having a rubber-grip handle helps clean my teeth better,
then this differentiation gives the producer a small amount of market power.
He/she could raise the price a little bit, and I would still buy that rubber-grip handle
toothbrush.
If they raise the price too much, though, I'll switch to some other type of toothbrush.
An oligopoly?
Well the prefix “oli” means “few,” so I'll have a few large producers making
up the market, each with a large amount of control, or market power.
There are some barriers to entry, so it's hard, but not impossible, to get in.
The product in an oligopolistic market can be identical, like the members of OPEC who
produce oil, or differentiated, like car manufacturers.
Also, the “small number” of producers could be just a handful, like cars, or a couple
dozen, like the oil producers.
The key is that there are few enough producers that each one has a fairly large chunk of
the market; large enough that any individual producer can affect what happens in the market.
Because everyone's actions matter, the producers become mutually interdependent; whatever one
does affects everyone else.
This mutual interdependence actually makes the oligopoly the most complicated type of
market structure to operate in.
Now that you know something about each market, I have an exercise for you: see if you can
come up with real-world examples for each type.
What kind of product, or products, would fit the perfectly competitive structure?
What about monopolistically competitive?
Oligopolistic?
What about monopolistic?
Have your answers ready, because I'll be asking for your responses in our next class.
NEXT TIME: Perfect competition TRANSCRIPT00(MICRO) EPISODE 25: MARKET STRUCTURES