Determining Market Structure for ECO-201 Milestone Three (Overall Market Section)

What is meant by Market Structure? Table 12.1on page 392 of your text has a table that quickly summarized the four different market structures:

I’ll quickly go over the different characteristics to help you decide which market structure your firm participates in.

Number of firms

The number of firms is referencing how much competition that your firm faces. In a perfectly competitive or monopolistically competitive market your firm will face many different competitors. In an oligopoly there will be a few major players that dominate the market. If your firm is a monopoly you are the only firm in your industry; you are the only seller of a good or service and there are no close substitutes.

Type of product

If your firm is in perfect competition, your firm produces a product that is identical to the product your competitors produce. In monopolistic competition your firm produces a product that is differentiated from the substitute products that its competitors produce. In an oligopoly the products could be identical or differentiated. A monopoly is the only firm in the industry, so the product produced is unique.

Ease of entry

Barriers to entry represent anything that prevents new firms from entering an industry in which firms are earning economic profits. In perfect competition the barriers to entry are non-existent or extremely low (in other words, it is very easy to enter the industry). In monopolistic competition the barriers to entry are also limited, which makes the ease of entry high for firms joining the industry. In order for oligopolies and monopolies to exist, there must be some significant barriers to entry that keep other firms from entering. Some examples of barriers to entry that allow oligopolies and monopolies to exist are: economies of scale, ownership of a key input, or government-imposed barriers (see pages 453-454 for more detail on these).

How does the market structure affect the firm’s ability to influence the market?

In perfect competition a firm is a “price taker”, which means that it is unable to affect the market price. Because there are many sellers, any one seller cannot shift the market supply curve to change the equilibrium price. In monopolistic competition firms are unable to earn economic profits in the long-run because (due to low entry barriers) firms will continue to enter the industry when economic profits are being earned and eventually those firms will eliminate the economic profits in the industry. Remember that economic profits are not the same thing as accounting profits (see page 250for further detail). In an oligopoly the interactions among firms are important in determining profitability because the firms are large relative to the market; a strong business strategy is crucial to maximizing profit (see information on game theory on pages 455-456). A monopolist IS the market and can make its own decisions on how to maximize and earn economic profits in the long-run. However, a monopolist is still subject to demand from consumers so unsuccessful monopolies do exist that are unable to earn a profit.