Transcript Market Structuresx

Market Structures
There are three general ways to
describe the role of business in the US
The first method is to examine the different types of
market structure. The market structure basically
depends on the number of firms in the industry and on
the degree of competition. On one end of the
spectrum is perfect (pure) competition. In a purely
competitive market structure, many firms exist such
that no single firm has the power to control the
market price or quantity of the product or service.
The firms in a perfectly competitive market
structure compete on the basis of price only as
products are standardized (homogeneous) and
are easily substituted. The closest the US
comes to a purely competitive market
structure is in the agricultural industry. For
example, there are few major differences
between the wheat of one farmer and that of
another. There are also many thousands of
wheat farmers with no single producer having
the ability to control the supply or the price.
On the opposite extreme of the spectrum is a monopoly. In a
monopoly, one firm exists in the industry and has control over the
supply of a unique product. Given a demand for the product, the single
firm can control the market price and quantity. Monopolies can be:

Natural: it doesn’t make sense to have multiple suppliers in the area
due to a large capital outlay or infrastructure requirement. This
could be the water, electricity or other utilities in your city.

Geographic: like the only store in a remote rural or mountainous
area

Legal: patents & copyrights give inventors & writers exclusive rights
to their products for a period of years
Most monopolies in the US are public utilities (gas, water, sewage,
electricity, etc) & are regulated by state and local governments.
In between the two extremes of pure competition &
monopoly are varying degrees of imperfect competition.
In the monopolistically competitive market structure,
many firms exist in the industry; however, some have
cornered a portion of the market and can, to some extent,
charge higher prices than their competitors. For example,
there are many producers of tennis shoes but brands like
Nike, Reebok, and Adidas dominate the market. If Nike or
Reebok charge outrageously high prices, there are plenty of
alternatives for people to buy. These name brands still
manage to sell at higher prices because a large segment of
the market prefers their product over the less
expensive alternatives.
Because these big name firms have captured a
part of the market, but do not control the market
price and quantity, they exist in a market
structure that is monopolistically competitive.
The tennis shoe industry is competitive because
there are large numbers of producers & many
alternatives to choose from. However, Nike,
Reebok and a few other firms can distinguish their
product in such as way as to capture a segment of
the market and charge higher prices (exercise a
type of monopolistic control).
When an industry is comprised of just a few
large firms which can dominate the market to
such an extent that they are able to impact the
market price and quantity through their
production and pricing decisions, the market
structure is said to be an oligopoly. Because
only a few large firms exist in the industry and
significantly control the market for the good or
service, there is a high concentration
of economic power in these firms and
little competition exists.
This is not to say that these firms do not engage in cutthroat
competition in attempts to eliminate the competition
because this is, in fact, exactly what they do. But because
there are only a few firms, there is not enough competition to
force them to lower prices or to provide better quality and
variety. Oligopoly occurs in two forms: pure and
differentiated. In a pure oligopoly, a few large firms produce
and sell a relatively standardized product such as oil or steel.
An example of a differentiated oligopoly in the US is the
automobile industry which is dominated by the “Big Three”
automakers: Ford, GM and Chrysler.
Next up: Business
Organization