Episode 25: Market Structures

Now, cost curves are always going to look
the same, but other elements, like price, revenue, and demand, will differ depending
on the market structure that the business operates in. Are there other lots of producers,
or only a few? Is my product just like everyone else’s, or is it unique? The characteristics
of a market will clue you in as to the type of market structure you’re dealing with. Really
there is a continuum of market structures. Let’s take a look. At one extreme, we have perfect competition.
Well, if it’s competitive, how many producers are we talking about? A lot. How many is “a
lot,” or “a large number”? Economists aren’t really specific about this, but a
large number of producers means that there are so many competitors that each one is too
small to affect the market. In my mind, I tend to think of maybe 100 or more, so that
each competitor has 1% or less of the market. Since nothing you do affects the market, no
one really cares what you do, and you are free to make decisions without worrying about
how the competition will react. How else can recognize a perfectly competitive market?
Besides having a large number of sellers, each of those sellers will be producing exactly
the same thing. In perfect competition, the product is identical — or homogeneous, or
non-differentiated — no matter who produces it. One more characteristic: it’s easy for
firms to come and go from the industry; that is, there is free entry and exit. Think about
it. This industry has lots of producers. Why? Because it’s easy to get in and set up shop.
In an industry like this — lots of producers, all producing exactly that the same thing
— how much market power (where market power is defined as the ability to control the price)
does an individual firm have? None. You have no ability to drive the price, because 1)
you’re so small, and 2) everyone else produces exactly what you do. TIME TO THINK: what would
happen if you tried to raise your price? Now let’s take a look at the opposite extreme
of the market structure spectrum. Instead of a huge number of producers, there’s only
one producer for the whole market, or a monopoly (the prefix “mono” meaning “one”).
Furthermore, the monopolist’s product is unique; there really are no substitutes for
this product. Lastly, in a monopolistic industry, entry by other firms it nearly impossible
due to the extremely high barriers to entry. We’ll get into this more later, but a barrier
to entry could be really high costs, or legal protection like patents or copyrights. Given
all of these characteristics — only one producer, a unique product, and no one else can get
into the industry to compete with you — how much market power (ability to control price)
does the monopoly producer have? The monopolist has complete control over the price, within
the boundaries of what consumers are willing to pay. Are there other structures? Sure — in fact,
most real-world industries will fall somewhere in the middle ground, not at the theoretical
extremes of perfect competition or monopoly. Two of these midrange structures are monopolistic
competition and oligopoly. A monopolistically competitive structure is
still competitive, so there are still a lot of producers; given there are lots of producers,
we can assume that entry into the industry is easy. Unlike perfect competition, however,
the products are not exactly the same. Highly similar, yes; highly substitutable, yes; but
not identical. Think about, oh, toothbrushes. You go to the store, and there are toothbrushes
with square heads, diamond heads, rubber-grip handles, bi-level bristles, toothbrushes that
play music, toothbrushes that glow in the dark, even with color indicators that tell
you when to buy a new toothbrush. All toothbrushes, all highly similar and highly substitutable,
but with slight differences. If I believe, as a consumer, that having a rubber-grip handle
helps clean my teeth better, then this differentiation gives the producer a small amount of market
power. He/she could raise the price a little bit, and I would still buy that rubber-grip
handle toothbrush. If they raise the price too much, though, I’ll switch to some other
type of toothbrush. An oligopoly? Well the prefix “oli” means
“few,” so I’ll have a few large producers making up the market, each with a large amount
of control, or market power. There are some barriers to entry, so it’s hard, but not impossible,
to get in. The product in an oligopolistic market can be identical, like the members
of OPEC who produce oil, or differentiated, like car manufacturers. Also, the “small
number” of producers could be just a handful, like cars, or a couple dozen, like the oil
producers. The key is that there are few enough producers that each one has a fairly large
chunk of the market; large enough that any individual producer can affect what happens
in the market. Because everyone’s actions matter, the producers become mutually interdependent;
whatever one does affects everyone else. This mutual interdependence actually makes the
oligopoly the most complicated type of market structure to operate in. Now that you know something about each market,
I have an exercise for you: see if you can come up with real-world examples for each
type. What kind of product, or products, would fit the perfectly competitive structure? What
about monopolistically competitive? Oligopolistic? What about monopolistic? Have your answers
ready, because I’ll be asking for your responses in our next class. NEXT TIME: Perfect competition

94 thoughts on “Episode 25: Market Structures

  1. @Giugy828 Yikes – I still haven't done oligopoly!! When I get through my original plan, I'm going back through to see what should be added next.

  2. Thanks a lot, I have exam tomorrow on Economics, and this really helps me to learn, as I cant concentrate by reading the text book.

  3. @flinagin ye the same problem here mate, they talk with the same intonation, and it gets me sleeping. Where do you study , USA or UK ? Im in UK , Bournemouth University.

  4. this is great- I take economics for IGCSE in High school- I understand most of it but i had trouble with Competition. Thank you very much, your work is very well appreciated.

  5. really detailed explanation, thanyou.
    I would say the Agricultural market best represents perfect competition and the market for personnel computers (Microsoft and Apple) best represents an Oligopoly market structure.

  6. My Profs, recommended this video I appreciate the break down and visual. I would like to thank you, you just help me get my A+. 😉

  7. Im doing this for a class in economics and your videos are awesome becuz there's lots of like drawings and entertaining 😀

  8. I loved the illustration of the disgruntled man when the price of rubber gripped toothbrushes increased. He walked off with the one that played music, brilliant! Haha 🙂

  9. your eco video can be make things mush simplier for me to understand the concept you are trying to explain.

  10. I just finished listening to a lecture on this and had no idea what he was talking about. You said in 6 minutes what he said in 15 and I actually understood yours. THANK YOU! (I have to write a paper on this!)

  11. very nice explanation easily understandable no need of difficult in understanding concepts thank you so much i was understood the whole market structure in 15 minutes time because of you i was expressing my gratitude for you thanking you a lot

  12. hi can somebody please send me this videos they will really help me in my studies.my internet connection is always poor and i want to download them on my laptop but i could not.can someone kindly help me out here please as to how to download them please…

  13. Thank you so much! I am an MBA student with a background in Sociology, many of these concepts are new information and you are making this learning process much easier. Many thanks from a Military Spouse! 

  14. Wow the cute visuals and soft voice really helped me cal down, concentrate, and study better. I have my Economy final tomorrow, and thanks to this I'm really making progress studying. Thanks a lot!

  15. LOVE your channel. It's the cutest economics channel EVERRR. They way you explain, is amazing. Helps me revise in minutes!

  16. Perfect Competition : Clothing

    Monopolistic Competition : Detergent

    Oligopoly: Mobile Phones, Laptops

    Monopoly : Pharmacetutical Companies with Patented products to cure a specific diseases.

  17. There is no perfect competition in the reality. It only exists in the theory.
    Monopolistic competition: boutiques
    Oligopoly: banking
    Monopoly: water supply

  18. I love these 'breakdown' videos. I read my chapters, go to class, review my notes..but nothing makes it all sync until I watch these & follow along 🙂

  19. Thank you so much! Just a few questions 😅 Do these market structures refer to big firms, companies only, or it can also relate to small businesses, online shops, small individual stores combined to contribute to the market? Eg. an ice cream store in a neighborhood

  20. Just came across your videos while frantically trying understand the similarities and differences between each market structure. Needless to say, your videos are amazing! Contains good amount of information & gets to the point. Thank you so much!

  21. thank you very much. I have been watching your lectures for sometimes. your examples and explanation is helping me a lot.

  22. Thanks so much for explaining this in simple terms using visual aids…I understood more about market structures in this 5 min video than I did in my monotonous 50 min economics lecture. Seriously, thanks a lot!!

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