Introduction to Market Structure

1. Module Micro: Econ: 21 57 Introduction to Market Structure • KRUGMAN'S • MICROECONOMICS for AP* Margaret Ray and David Anderson

2. What you will learnin thisModule: • The meaning and dimensions of market structure. • The four principal types of market structure—perfect competition, monopoly, oligopoly, and monopolistic competition.

3. Market Structures • The way a product is supplied depends on how the industry is structured. Economists define four different market structures; perfect competition, monopoly, oligopoly, and monopolistic competition.

4. Defining Market Structures • How many Firms? • Type of product?

5. Perfect Competition • Two necessary conditions for perfect competition • Firms are price-takers • Free entry and exit

6. Monopoly • A monopolist is a firm that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly. • A monopoly industry has barriers to entry. • Ownership of essential resources • Economies of scale • Technological superiority • Government created barriers

7. Oligopoly • An oligopoly is an industry characterized by a small number of large firms with some degree of market power. • Characteristics of an oligopoly industry include; • a few large firms • barriers to entry • interdependence

8. Measuring Market Power • Four-firm Concentration Ratio (CR4): Add up the market share of the four largest firms in the industry. • Herfendahl-Hirschmann Index (HHI): The sum of the market shares, squared, for all firms in the industry.

9. Monopolistic Competition • Monopolistic competition is a market structure characterized by • Many firms • Differentiated product • No barriers to entry/exit