Market structure

Question 1

Order of efficiency

Answer 1

Perfect – perfect competition
M – Monopolistic competition
O – oligopoly
M – monopoly

Question 2

Perfect Competition (or Pure Competition)

Answer 2

• A market where there are MANY buyers and sellers that no single buyer or seller can affect the
  price of a good or service.
• Firms maximize their profits by reducing their costs because they can only charge the going rate
  for a product.
• Products are identical.
• Low barriers to entry and market power.
• Most competitive market
• Not real – used as model to judge how competitive other markets are.
• Example would be agricultural products.

Question 3

Monopolistic Competition

Answer 3

 Many buyers and sellers in the market so that no one company can dominate the production or
price of a product.
 Different products because they are so similar, almost identical. The purpose is to try to make
your product stand out so that the producer can create brand loyalty.
 Low barriers to entry and market power.
 Real world – think of shampoo choices and how different companies try to make their product
seem different with labeling, ads, slogans, logos, scents, etc.
 Very competitive

Question 4

Oligopoly
also includes cartel and collusion

Answer 4

 A few sellers (3-5)
 Similar, but differentiated products. They use the same differentiation techniques as Monopolistic competition.
 High barriers to entry and market power.
 Example: cereal (Post, Kelloggs, and General Mills)
 Cartel – oligopoly that openly sets prices and product – illegal.
 Collusion – oligopoly that secretly sets prices – illegal.
 Cartels and Collusions are illegal in the US because they both fix prices and that goes against a
Free Enterprise system.

Question 5

Monopoly

Answer 5

 One producer
 Total market power
 The least competitive of the four types of markets
 High market power, but there are three forces that limit their control (consumers, potential competition, and the government)

Question 6

Different kinds of monopoly
4 KINDS

Answer 6

GEOGRAPHIC – location creates the monopoly (ex. Disney World).
NATURAL- efficiency creates the monopoly (ex. Power company).
GOVERNMENT – goods made and distributed by the government (ex. US postal service)
TECHNOLOGY– granted government permission to own the rights to something. Ex. Patent and copyright.