Chapter 10 & 11

Perfect Competition, Monopoly, Monopolistic Competition, Oligopoly

Market organization is often used synonymously with “industry.” Both refer to way participants are organized in a market and how many participants there are.

Each Market Organization exhibits 5 characteristics:

1. number of firms;

2. type of products;

3. ease of entering and leaving a market;

4. amount of information about the market

5. degree of price control

There are four types of market organizations:

Perfect Competition (e.g. wheat framers)

“a great many small firms produce a homogeneous product”

1. Great many sellers
2. Homogeneous product
3. Complete freedom to enter or leave the industry
4. Perfect information about the market
5. No price control

Monopoly (e.g. cable tv)

“there is only one seller of a product”

1. Single seller
2. Unique product (no substitutes)
3. Very difficult to enter or leave the market
4. The monopolist has complete information about the market
5. Great deal of price control

Monopolistic Competition (e.g. clothing industry)

“many firms produce differentiated products but are similar enough to be substituted”

1. Many sellers
2. Differentiated products
3. Relatively easy to enter and leave market
4. Firms have reasonably complete information about the market
5. Some price control

Oligopoly (e.g. car manufacturers)

“a relatively few firms which behave like monopolistic competition”

1. Few interdependent firms
2. Identical or differentiated products
3. Difficult to enter or leave the market
4. Firms have incomplete information about the market
5. Varying degrees of price control

Specialized terms:

Cartel – a formal organization of firms in the same industry acting together (oil producers)

Collusion – when firms act together rather than separately (professional sports)

Pure Oligopoly – the few firms all produce identical products (gasoline)

Differentiate Oligopoly – few firms produce differentiated products (automobile manufacturers)

Natural monopoly – occurs when no competition is practical; (cable tv)

Patent – legal protection for an inventor providing sole rights to the product invented (like copyright)

Price Setter – a firm that has some control over the price of its products (Microsoft)

Price Taker – a firm whose products’ prices are determined by outside forces (professional athletes)