Alternative Market Structures
It is traditional to divide industries into categories according to the degree of competition that exists between the firms within the industry. There are four such categories. At one extreme is perfect competition, where there are very many firms competing. Each firm is so small relative to the whole industry that it has no power to influence price. It is a price taker. At the other extreme is monopoly, where there is just one firm in the industry, and hence no competition from within the industry. In the middle come monopolistic competition, which involves quite a lot of firms competing and where there is freedom for new firms to enter the industry, and oligopoly, which involves only a few firms and where entry of new firms is restricted.
To distinguish more precisely between these four categories, the following must be considered:
• How freely can firms enter the industry? Is entry free or restricted? If it is restricted, just how great are the barriers to the entry of new firms?
• The nature of the product. Do all firms produce an identical product, or do firms produce their own particular brand or model or variety? The firm’s degree of control over price. Is the firm a price taker or can it choose its price, and if so, how will changing its price affect its profits? What we are talking about here is the nature of the demand curve it faces. How elastic is it? If the firm puts up its price, will it lose (a) all its sales (a horizontal demand curve), or (b) a large proportion of its sales (a relatively elastic demand curve), or (c) just a small proportion of its sales (a inelastic demand curve)?
• The market structure under which a firm operates will determine its behavior. Firms under perfect competition will behave quite differently from firms which are monopolists, which will behave differently again from firms under oligopoly or monopolistic competition. This behavior (or ‘conduct’) will in turn affect the firm’s performance: its prices, profits,
To distinguish more precisely between these four categories, the following must be considered:
• How freely can firms enter the industry? Is entry free or restricted? If it is restricted, just how great are the barriers to the entry of new firms?
• The nature of the product. Do all firms produce an identical product, or do firms produce their own particular brand or model or variety? The firm’s degree of control over price. Is the firm a price taker or can it choose its price, and if so, how will changing its price affect its profits? What we are talking about here is the nature of the demand curve it faces. How elastic is it? If the firm puts up its price, will it lose (a) all its sales (a horizontal demand curve), or (b) a large proportion of its sales (a relatively elastic demand curve), or (c) just a small proportion of its sales (a inelastic demand curve)?
• The market structure under which a firm operates will determine its behavior. Firms under perfect competition will behave quite differently from firms which are monopolists, which will behave differently again from firms under oligopoly or monopolistic competition. This behavior (or ‘conduct’) will in turn affect the firm’s performance: its prices, profits,
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