10.1

• Market structures refer to the organizational setup of a market, defined by the number of firms, the nature of products, and the degree of competition. The four main types of market structures are:

  • perfect competition
  • monopoly
  • oligopoly
  • monopolistic competition
• Perfect Competition – Many firms, no control over price, no entry barriers, homogeneous products
• Monopoly – Single firm dominates the market, significant control over price, high entry barriers
• 1. Monopolistic Competition – Many firms, differentiated products, some price control, and low entry barriers (e.g., corner shops).
• Oligopoly – A few large firms dominate the market, some control over price, high entry barriers (e.g., car manufacturers).
• Imperfect competition exists when firms face a downward-sloping demand curve. This means that firms can influence the prices of their products because the goods or services they offer are not perfect substitutes
• Imperfect competition typically exists in monopolistic competition and oligopoly.
• • Monopolistic competition features many sellers with differentiated products, like restaurants. Although firms in monopolistic competition have some control over pricing, they face competition from firms offering similar products.
• • Oligopoly exists when a few firms dominate the market, such as in the automotive industry, where companies like Ford and Toyota influence prices.
• • A natural monopoly occurs when a single firm can serve the entire market at a lower cost than multiple firms could. In this case, economies of scale allow the firm to produce at a lower average cost than any competitors, creating barriers to entry for other firms.
• Perfect vs. Imperfect Competition:

  • Perfect competition: Large numbers of firms, no pricing power, homogeneous products.
  • Imperfect competition: Firms have pricing power because of differentiated products or oligopolistic market structures.
• Oligopoly:

  • Features a few firms with significant market power.
  • Firms may collude (form cartels) to set prices, but collusion is illegal in most countries.
  • Firms are interdependent, meaning each firm must consider the actions of its rivals when setting prices or output levels.
• Monopolistic Competition:

  • Similar to perfect competition, but products are differentiated (e.g., different types of restaurants).
  • Firms have some degree of market power, allowing them to set prices above marginal cost.
  • There is free entry and exit in the long run, which leads to normal profits (zero economic profit).
• Natural Monopoly:

  • A single firm can supply the entire market at a lower cost than multiple firms could due to economies of scale.
  • Examples include utilities like water or electricity suppliers.
• Minimum Efficient Scale (MES):

  • The smallest amount of production a firm can achieve while still taking full advantage of economies of scale. The lower the MES relative to market size, the more firms can enter the industry.
• N-firm Concentration Ratio (CR4):

  • Measures the total market share of the four largest firms in an industry.
  • Higher CR4 ratios indicate more concentrated industries, while lower CR4 ratios suggest more competitive industries.
• Oligopoly Behavior:

  • In an oligopoly, firms often have some price-setting power due to a lack of competition and differentiation in products.
  • Firms may choose to collude or cooperate to keep prices higher, but this is usually illegal in most markets.
• Natural Monopoly Behavior:

  • Natural monopolies often arise in industries where the initial fixed costs are very high, but the marginal costs of serving additional customers are very low. Examples include utilities like water or electricity supply.
• Natural monopolies are unique because they involve a single firm that can produce more efficiently than multiple firms due to significant economies of scale.