Identifying Market Structure

Have you ever been out with friends and gotten into a heated debate about whether an industry was a monopolistically competitive industry or an oligopolistic industry?

There are several ways to look at market structure. Typically, five characteristics help to define the type of market structure. 1. _The number and size of firms:_ Are there a lot of firms or just a few? 2. _The degree of differentiation in the product:_ Is it easy to tell the difference between various producer’s products? 3. _The seller’s pricing power:_ Can the producer influence the market equilibrium price? Are they price takers or price makers? 4. _The barriers to entry and exit:_ How easy is it for competition to enter the market? 5. _The degree of non-price competition:_ Do the firms use advertising? With these five criteria you can classify most firms along a spectrum where perfect competition is one extreme and monopoly is the other. Most firms fall somewhere in the middle.

The following table summarizes the kinds of market structures and their characteristics. |Market Structure |Number of Sellers |Degree of Product Differentiation |Barriers to Entry |Pricing Power of Firm |Non-Price Competition | |------------------------|------------------|----------------------------------|------------------|----------------------|----------------------------------------| |Perfect Competition |Many |Homogeneous/Standardized |Very Low |None |None | |Monopolistic Competition |Many |Differentiated |Low |Some |Advertising and Product Differentiation | |Oligopoly |Few |Homogeneous/Standardized |High |Some or Considerable |Advertising and Product Differentiation | |Monopoly |One |Unique Product |Very High |Considerable |Advertising |

So that you don’t find yourself in a bind the next time that happens, you might want to examine the different criteria that are used to __identify market structure__.

Suppose that Kim has a small farm in Nebraska, where she grows soybeans. What kind of market is Kim in?

Correct.

Incorrect. A main characteristic of this market is product differentiation. Suppose that you had to tell the difference between the soybeans grown by Kim and those grown by her neighbor Ned. Most people would not be able to tell the difference.

What kind of market structure do you think the US automobile retail industry has?

Incorrect. Notice that the question is asking about the retail aspect of the automobile industry. This is actually an example of monopolistic competition.

Correct. This is an example of monopolistic competition.

In summary: [[summary]]

This is the classic example of perfect competition. Kim runs one of many farms selling a product that is not differentiable. She has no influence on the market price. Entry and exit is relatively easy, and there is no reason for Kim to advertise her soybeans or do any other non-price competition.

There are many sellers of different cars, but it’s relatively easy to open a car dealership. You have to advertise a lot (using impersonators of former presidents, perhaps), and there is some pricing power. Determining these five things should clear up everything regarding the market structure debate between you and your friends, and perhaps save the night!

Perfect competition

Monopolistic competition

Oligopoly

Monopolistic competition

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