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Competition and Market Structures. Competition. In the context of markets, competition refers to the situation when producers would each like to sell their goods or services to the same customers.
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Competition • In the context of markets, competition refers to the situation when producers would each like to sell their goods or services to the same customers. • The great benefit of competition is that when producers compete, they must seek to entice the consumer with a lower price or more desirable quality. • Thus, competition creates incentives to find ways to produce at lower cost, to invent desirable variations on existing products and to discover new products.
Market Structures • Market structure refers to the ways that competition occurs, based on the number of firms, the similarity of the products being sold and the ease of entry for new firms or exit for existing firms. Firms make different decisions about the quantities to produce and prices to charge depending on the market structure of their industry.
Terms you should know! • There are four main market structures- perfectly competitive, monopoly, oligopoly, and monopolistic competition. • Barriers to entry are factors that make it difficult for new firms (companies) to enter the market (ex. Start up costs and technology).
Perfect Competition • Perfect/pure competition describes a market with many buyers and sellers of the same (identical) good. • There are no barriers to entry and exit. • There are many firms. • No control over prices. • Examples- wheat, socks, salt, nuts and bolts.
Monopolistic Competition • Monopolistic Competition is a market in which there are many companies that sell similar but not identical products. • There are many firms. • They have little control over prices. • They use nonprice competition, competition through means other than price, to compete (ex. Advertising). • There are low barriers to entry. • Examples include jeans and ice cream.
Oligopoly • Market dominated by a few large firms. • Some variety in goods. • Some control over prices • High barriers to entry. • Examples-car companies, movie studios, airlines, soda companies and cereal. • Oligopolistic firms sometimes use illegal practices to set prices or reduce competition. This collusion, price fixing, is an agreement among firms to sell at the same or similar prices. The US govt. assesses heavy penalties for collusion.
Monopoly • A firm has a monopoly when it controls an entire market. Hence, there is only one company that sells the product/service. • No variety of goods. • Complete barrier to entry/exit. • Complete control over prices.
Types of Monopolies • Natural monopolies occur when the market runs most efficiently with one seller of a good/service. • Geographic monopoly occurs when there is only one firm that offers a good or service in a particular area. • Government monopolies provide goods/services for people through a government agency. • The government can grant monopoly power by issuing a patent or license.
