Econ: Market Structure Characteristics

Prices and the price system determine what goods and services will be produced, how they will be produced, and who will receive them. Prices are affected by many factors. The truth is that even in a free market economy, not all industries and markets are equally competitive. Market structure refers to the organization of a market based mainly on the degree of competition among producers. Economists define market structure according to four main characteristics: number of producers, similarity of products, ease of entry, and control over prices. 

The number of producers in a market helps determine the level of competition. Markets with many producers are more competitive.

The degree to which products in a market are similar also affects competition. The more similar the products are, the greater the competition among their producers.

Markets differ in their ease of entry, which is a measure of how easy it is to start a new business and begin competing with established businesses. Markets that are easy to enter, with few restrictions, have more producers and are thus more competitive.

Markets also differ in the degree to which producers can control prices. The ability to influence prices, usually by increasing or decreasing the supply of goods, is known as market power. The more competitive the market, the less market power any one producer will have.

Economists have identified four basic market structures: perfect competition, monopolistic competition, oligopoly, and monopoly.

Perfect competition is the most efficient and competitive market structure. It consists of many producers who provide identical goods, usually referred to as commodities. Prices are established by the interaction of supply and demand.

Monopolistic competition is a market in which many producers provide a variety of similar goods. Such markets are characterized by the use of nonprice competition to differentiate products and build brand loyalty. To the extent that firms monopolize their own brands, they may have some control over prices, but such markets remain relatively competitive.

An oligopoly is a market dominated by a small number of producers who provide similar, but not identical, goods. Firms in an oligopoly often set prices based on other firms’ pricing decisions. Because oligopolies can dominate markets, their effect may be much like that of a monopoly.

A monopoly is the opposite of perfect competition. In a monopoly, a single producer provides a unique product and therefore has significant control over prices. The government permits certain kinds of monopolies to exist because they are believed to serve the public interest.

7.2 What Is Perfect Competition (pp.120-123)
7.3 What Is a Monopoly (pp.123-127)


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