MARKET

STRUCTURES
Chapter 7
Perfect and Imperfect
Competition
■ In a perfect competition, no participant in
the market can influence prices.
■ In an imperfect competition, firms have
some influence over market prices, albeit in
varying degrees.
PERFECT/PURE COMPETITION
 A market structure where there are many
buyers and sellers.

■ Large Number of Small Firms

■ Homogeneous Product
■ Very Easy Entry and Exit
Large Number of Small Firms
■ The larger-number-of-sellers condition is met when
each firm is so small relative to the total market that
no single firm can influence the market price.

Homogeneous Product
■ If a product is homogeneous, buyers are indifferent
as to which seller’s product they buy.
■ Standardized product
Very Easy Entry and Exit
■ Very easy entry into a market means that a
new firm faces no barriers to entry. Barriers
can be financial, technical, or government-
imposed barriers, such as licenses, permits,
and patents.
■ Perfect competition requires that resources
be completely mobile to freely enter or exit the
market.
The Perfectly Competitive Firm as
a Price Taker
■ Price taker – a seller that has no control over
the price of the product it sells.
■ The price of its products is determined by
market supply and demand conditions over
which the firm has no influence.
MONOPOLY
A market structure where there is only one seller that
represents the whole industry.

■ Single seller
■ No close substitutes
■ “Price maker”
■ Blocked entry
■ Non-price competition
Single Seller

■ A pure, or absolute, monopoly is an industry

in which a single firm is the sole producer of
a specific good or the sole supplier of a
service; the firm and the industry are
synonymous.
No Close Substitutes
■ A pure monopoly’s product is unique in that
there are no close substitutes. The consumer
who chooses not to buy the monopolizes
product must do without it.
Price Maker
■ The pure monopolist controls the total quantity
supplied and thus has considerable control
over price; it is a price maker.
Blocked Entry
■ A pure monopolist has no immediate
competitors because certain barriers keep
potential competitors from entering the
industry.
■ Those barriers may be economic, technological,
legal, or of some other type. But entry is totally
blocked in pure monopoly.
Non-Price Competition

■ The product produced by a pure monopolist

may be either standardized (as with natural
gas and electricity).
■ Price discrimination is the business practice
of selling the same good at different prices to
different customers, even though the cost of
production is the same for all customers.
OLIGOPOLY
A market dominated by a few large producers
of a homogeneous or differentiated product.
■ Because of their “fewness,” oligopolists have
considerable control over their prices, but each must
consider the possible reaction of rivals to its own
pricing, output, and advertising decisions.
■ Cartel – the players coordinate prices and production.
Types of Oligopoly:
■ The players are the same or there are no disparities
between them.
■ There is dominant player among several players.
■ There are only two players.
■ Oligopoly in a perfect collusion, there is a dominant
player and products are differentiated.

 Competitors or “players” in this kind of structure collude.

A Few Large Producers
■ “Big Three”
■ “Big Four”
■ “Big Six”
Homogeneous or Differentiated
Products
■ Differentiated oligopolies typically engage in
considerable non-price competition supported
by heavy advertising.
Control Over Price, but Mutual
Interdependence
■ “Price Maker”
■ Strategic behavior – self-interested behavior that takes
into account the reactions of others.
■ Mutual interdependence – a situation in which each
firm’s profit depends not entirely on its own price and
sales strategies but also on those of the other firms.
■ Ex. In deciding on its advertising strategy, McDonalds
will take into account how Jollibee might react.
Entry Barriers

■ Economies of Scale
■ Large expenditure for capital – the cost of obtaining
necessary plant and equipment
Mergers
■ The merging, or combining, of two or more competing
firms may substantially increase their market share,
and this in turn may allow the new firm to achieve
greater economies of scale.
■ Another motive underlying the “urge to merge” is the
desire for monopoly power.
Oligopoly Behavior: A Game Theory
Overview
■ Oligopoly pricing behavior has the characteristics of
certain games of strategy such as poker, chess, and
bridge.
■ Game Theory – the study of how people behave in
strategic situation
■ Payoff matrix
■ Duopoly – two-firm oligopoly
Game Theory
■ Game theory reveals that:
1. Oligopolies are mutually interdependent in their
pricing policies
2. Collusion enhances oligopoly profits
3. There is a temptation for oligopolists to cheat on
a collusive agreement.

Collusion – cooperation with rivals.

The Prisoner’s Dilemma
In the game presented, both firms realize they would make higher
profits each used a high-price strategy. But each firm ends up
choosing a low-price strategy because it fears that it will be worse off
if the other firm uses a low-price strategy against it.
The game described is known as the prisoner’s dilemma game because
it is similar to a situation in which two people – let’s call them Betty
and Al – have committed a diamond heist and are being detained by
the police as prime suspects. Unknown to the two, the evidence
against them is weak, so that the best hope that the police have for
getting a conviction is if one or both of the thieves confess the crime.
The police place Betty and Al in separate holding cells and offer each
the same deal: Confess to the crime and receive a lighter prison
sentence.
The Prisoner’s Dilemma
Each detainee therefore faces a dilemma. If Betty remains silent and Al
confesses, Betty will end up with a long prison sentence. If Betty
confesses and Al says nothing, Al will receive a long prison sentence.
What happens? Fearful that the other person will confess, both
confess, even though they each would be better off saying nothing.
The “confess-confess outcome” is conceptually identical to the “low
price-low price” outcome in pricing game.
MONOPOLISTIC COMPETITION
Market structure refers to many firms selling
differentiated products.

■ Relatively large number of sellers

■ Differentiated products (often promoted by
heavy advertising)
■ Easy entry to, and exit from, the industry
Relatively Large Number of Sellers
■ Monopolistic competition is characterized by a fairly large
numbers of firms.
■ Consequently, monopolistic competition involves:
– Small market share: Each firm has a comparatively small
percentage of the total market and consequently has limited
control over market price.
– No collusion: The presence of a relatively large numbers of
firms ensures that collusion by a group of firms to restrict
output and set prices in unlikely.
– Independent action: Each firm can determine its own pricing
policy without considering the possible reactions of rival
firms.
Differentiated Products
■ Product differentiation
– Product attributes
– Service
– Location
– Brand names and packaging
– Some control over price
Easy Entry and Exit

■ Small firms
■ Capital requirements are low
■ Economies of scale are few
■ Nothing prevents an unprofitable monopolistic
competitor from holding a going-out-of-business sale
and shutting down
 Advertising
■ The expense and effort involved in product
differentiation would be wasted if consumers were not
made aware of product differences.
■ The goal of product differentiation and advertising –
so called non-price competition – is to make price less
of a factor in consumer purchases and make product
differences a greater factor. If successful, the firm’s
demand curve will shift to the right and will become
less elastic.
Price and Output in Monopolistic
Competition
■ Assumptions:
– Each firm in the industry is producing a specific
differentiated product
– Each engage in a particular amount of advertising

In this market structure, consumer’s loyalty is

experienced by the seller, when certain consumers
prefer their brand over others.