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Part 3 • PRICES, PROFITS, AND INDUSTRY PERFORMANCE
MARKET TYPES
The four market types are
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Perfect competition
Monopoly
Monopolistic competition
Oligopoly
Perfect Competition
Perfect competition
A market in which there are many
firms, each selling an identical product;
many buyers; no restrictions on the
entry of new firms into the industry;
no advantage to established firms; and
buyers and sellers are well informed
about prices.
Perfect competition exists when
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Many firms sell an identical product to many buyers.
There are no restrictions on entry into (or exit from) the market.
Established firms have no advantage over new firms.
Sellers and buyers are well informed about prices.
These conditions that define perfect competition arise when the market
demand for the product is large relative to the output of a single producer. And
this situation arises when economies of scale are absent so the efficient scale of
each firm is small. But a large market and the absence of economies of scale are
not sufficient to create perfect competition. In addition, each firm must produce a
good or service that has no characteristics that are unique to that firm so that consumers don’t care from which firm they buy. Firms in perfect competition all look
the same to the buyer.
Wheat farming, fishing, wood pulping and paper milling, the manufacture of
paper cups and plastic shopping bags, lawn service, dry cleaning, and the provision of laundry services are all examples of highly competitive industries.
Other Market Types
Monopoly
A market for a good or service that
has no close substitutes and in which
there is one supplier that is protected
from competition by a barrier
preventing the entry of new firms.
Monopolistic competition
A market in which a large number of
firms compete by making similar but
slightly different products.
Oligopoly
A market in which a small number of
firms compete.
Monopoly arises when one firm sells a good or service that has no close substitutes and a barrier blocks the entry of new firms. In some places, the phone, gas,
electricity, and water suppliers are local monopolies—monopolies that are
restricted to a given location. For many years, a global firm called DeBeers had a
near international monopoly in diamonds.
Monopolistic competition arises when a large number of firms compete by
making similar but slightly different products. Each firm is the sole producer of
the particular version of the good in question. For example, in the market for running shoes, Nike, Reebok, Fila, Asics, New Balance, and many others make their
own versions of the perfect shoe. The term “monopolistic competition” reminds
us that each firm has a monopoly on a particular brand of shoe but the firms compete with each other.
Oligopoly arises when a small number of firms compete. Airplane manufacture is an example of oligopoly. Oligopolies might produce almost identical products, such as Kodak and Fuji film. Or they might produce differentiated products
such as the colas produced by Coke and Pepsi.
We study perfect competition in this chapter, monopoly in Chapter 11, and
monopolistic competition and oligopoly in Chapter 12.