No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eight: Market Structure: From competition to monopoly 182 This chapter will explore market structures and how they differ in results for consumers. We will begin with a theoretical review of perfect competition as our baseline, compare it with monopoly, and follow with a short review of other market structures (oligopoly and monopolistic competition). PERFECT COMPETITION Our discussion of monopoly shows a real world where entrepreneurs try to distinguish their product from others in order to obtain higher profits than normally available in competitive markets. This view of the real world competitive market process can be contrasted with a hypothetical “perfect” competition model. In this perfectly competitive model, firms don’t have any influence over the price of the good or service. They are price takers : their only decision is to produce and sell at the market price, or not produce at all. Features of the perfectly competitive market include: § § many producers, each selling an identical product § § many buyers, none buying enough that they can influence the price § § no barriers to entry § § buyers and sellers each have complete information about the product and the market § § minimal government regulation Figure 8.1, Perfect Competition, market and individual supply and demand curves. The wheat market may be thought of as a perfectly competitive market, with the market demand and supply curves determining an equilibrium price and quantity. Global wheat production has exceeded 650 million metric tons previously, so Farmer Joe is a very small player in that market—he has to accept the market price if he wants to sell at all, hence Farmer Joe’s demand curve is horizontal at the market price. He can sell any quantity he can produce at P*=$2. P ($) Q (#) Q *= 650M tons 2 D Wheat Market Q (#) P ($) Farmer Joe S=MC D=MR Q *= 5 tons P * S Price takers: Firms in a “perfectively competitive” market structure sell identical products and have no market power; that is, they have no ability to influence the price of their product.