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The Markets
There are four market structures in economics:
- Pure or Perfect Competition
- Monopolistic Competition
- Oligopolies
- Monopolies
Let's explore each of these market structures more closely.
Pure or Perfect Competition
Pure or perfect competition is the most challenging market structure for students to understand because it really does not exist. The closest examples we have for this market are found in bottled water and agriculture.
Think about this:
- Bottled water is bottled water.
- Wheat is wheat.
- Corn is corn.
- Pigs are pigs.
All of these products are essentially the same or homogeneous, although some agricultural products (commodities) can vary in quality according to the farmers.
Entry and exit into these markets is easy, and barriers are rare.
Product differentiation through advertising would be silly because the product is the same. This means there is no non-price competition.
The reason we have this market in economics is to understand a basic structure from which all are markets are compared to for analysis.
Pure or perfectly competitive firms are price takers. There are many sellers, many competitors, and many buyers.
Monopolistic Competition
Imagine the busiest road in your hometown where you see a lot of businesses such as gas stations, fast food restaurants, malls with clothing stores, or even storefronts for plumbers and electricians. This is a monopolistic competitive market.
There are many sellers and many buyers.
Entry into the market is relatively easy.
The sellers are price takers. For example, there is very little difference in the price of the fast food choices, so what do sellers do to get you to buy their product? They try to distinguish or differentiate their product through advertising and packaging. Toys for kids, great commercials by athletes, and cool packaging are designed to convince you to buy their similar product instead of one offered by the competitor.
Another example of monopolistic competition is toothpaste and washing detergent.
- The price difference between tubes and boxes is slight, meaning there is some control over price; the advertising and packaging is what convinces us to buy one brand over the other brands.
- If we only buy one brand, we may be willing to pay a little extra because we are brand loyal. There are a lot of Alabama fans who only buy Tide, for reasons having nothing to do with price.
Oligopolies
Watch the video Oligopolies (28:19) from Annenburg Learner to learn about oligopolies.
Oligopolists are price makers.
There are few sellers.
Barriers to enter the industry are very strong; few can enter because of the competition.
Some oligopolists use advertising to entice buyers to buy their product which is why we might choose to buy a Mercedes, a Honda, or a Chevrolet. Others, such as the steel industry, do not advertise at all.
Both industries have considerable control over the price of their products.
Complete the following fill-in-the-blank activity to review what you've learned:
- _______Blank sellers that offer a product to consumers belong to a market structure known as an oligopoly.
- A product that is only sold by a few businesses may have a high price because buyers have _______Blank.
- Oligopolists have considerable control over _______Blank.
- If the oligopolists collude In this case, jointly agree to 'fix' the price at a certain high level the government will intervene and break up the collusion by placing penalties such as _______Blank on their actions.
- Several years ago, the TVA (Tennessee Valley Authority) was involved in setting a high price for _______Blank that customers had to pay.
Oligolies and Cartels
The car industry is an oligopoly.
Another oligopoly is the oil industry in foreign countries. OPEC (Oil Producing Exporting Countries or Organization of the Petroleum Exporting Countries) was founded by 5 countries in the Middle East and Venezuela in 1960. It now has 14 member countries Current members include Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Republic of the Congo, Saudi Arabia, United Arab Emirates, and Venezuela on three continents.
An example of a group of suppliers that often collude and form a cartel is OPEC (Oil Producing Exporting Countries or Organization of the Petroleum Exporting Countries).
- OPEC includes all of the countries in the Middle East and Venezuela.
- In the 1970s OPEC caused a severe worldwide economic crisis when they intentionally decreased the drilling of oil in an effort to increase the price of gasoline.
- These countries are not subject to the laws and regulations of the United States. Since that time, the United States has become independent of OPEC as a result of new drilling methods and resources that prevent supply shocks such as the one in the 1970s from affecting our economy today.
Is it possible for milk producers to form a cartel? Read (or listen) to the NPR article Independent Farmers Feel Squeezed By Milk Cartel and decide for yourself.
Monopolies
Watch the video Monopoly (28:34) from Annenburg Learner to learn about monopolies.
Monopolies are price makers; they have the power to set the price because their product is unique.
There is only one seller.
Barriers to enter the industry are strong; it is impossible for new suppliers to enter the market.
Sellers do not have to use advertising to entice buyers to buy their product, but some do for public relations reasons.
Complete the following fill-in-the-blank activity to review what you've learned:
- John Rockefeller created the _______Blank in 1870 and controlled the price of _______Blank until 1911 when the government dissolved the company for unfair pricing practices.
- The US government claimed the company was a _______Blank (or _______Blank).
- Because of this market structure, legislation known as the _______Blank was passed by Congress and signed by the president, which dissolved the monopoly.
- Consider: Would you have voted to break up Rockefeller's Standard Oil Company had you been a member of Congress?
- Is there such a thing as a "good monopoly"?
One of the most famous political cartoons was published during the controversy surrounding the Standard Oil Company. Have you seen it before? Called "Next!" and drawn by Udo Keppler in 1904, it shows the Standard Oil storage tank as an octopus with many tentacles wrapped around the steel, copper, and shipping industries, as well as a state house, the U.S. Capitol, and one tentacle reaching for the White House.
Types of Monopolies
There are four types of monopolies. Let's see an example of each kind.
- Alabama Power is a natural monopoly that uses advertising to form a connection with its customers.
- It is "natural" for the government to protect utility companies from competition because one company can offer services and prices that are efficient and fair.
- Economists call this benefiting from economies of scale.
- Rate increases have to be approved by the State Public Service Commission, so price increases are rare but permitted if the Power Company can justify the increase.
- DeBeers Diamond Mines is a key resource monopoly that advertises that "A diamond is a girl's best friend" and "Diamonds are forever" to avoid the potential competition of other precious stones being chosen by the bride-to-be.
- A single grocery store in a small town is a geographic monopoly that advertises the price of milk to avoid giving a customer a reason to drive a long distance to another store.
- There are two types of government-sponsored monopolies and neither advertises specifically.
- A patent protects inventors of new devices, products, and ideas.
- A copyright protects writers.