• Writing Assignment 2
• Market Structure
• In economics, market structure is characterized by the number of firms producing identical or differentiated products. In general there were four basic market structures covered in this class:
o Monopolistic competition where there are a large number of firms, each having a small proportion of the market share and differentiated products.
o Oligopoly, in which a market is dominated by a small number of firms that together control the majority of the market share.
o Monopoly, where there is only one provider of a product or service. (Including natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms.)
o Perfect competition is a market structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly elastic demand curve.
• The imperfectly competitive structures are quite realistic market conditions where monopolistic competitors, monopolists, and oligopolists exist and dominate the market conditions. The elements of market structure include the number and size distribution of firms, entry conditions, and the extent of differentiation.
These conditions tend to determine some but not all details of a specific market system where buyers and sellers actually meet and commit to trade. Competition is useful because it reveals actual customer demand and induces the seller (operator) to provide service quality levels and price levels that buyers (customers) want, typically subject to the seller’s financial need to cover its costs. In other words, regardless of market structure, profit maximization prompts firms to produce the level of output at which marginal cost equals marginal revenue!
Quick Reference to Basic Market Structures
Market Structure Seller Entry Barriers Seller Number Buyer Entry Barriers Buyer Number
Perfect Competition No Many No Many
Monopolistic competition No Many No Many
Oligopoly Yes Few No Many
Monopoly Yes One No Many
• The correct sequence of the market structure from most to least competitive is perfect competition, monopolistic competition, oligopoly, and monopoly. The main criteria by which one can distinguish between different market structures are: the number and size of producers and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely.
• Prepare an essay 2-3 pages in length that discusses the appropriate use of advertising by each market structure with careful emphasis on the applicable messages and methods a firm in each market structure would employ. Document all assertions and use the appropriate format for this research memo.