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Market Structures

Marketing

Market Structures. Find real world examples of each and apply the criteria for defining markets (number of producers, similarity of production, barriers to entry) to those markets to determine how close they fit the textbook definition.

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Here are some real-world examples of each market structure that fit the definitions provided by most economic textbooks:

Perfect competition:

  • Apples and Oranges. In this market, there are many firms. Most agricultural commodities are close to perfect competition since it is easy to enter and exit the market, firms sell identical items and they must take the market price, which is usually set in the futures market. Advertising by an individual firm is counterproductive since all firms sell identical products and the consumer only cares about price.

Monopolistic competition:

  • Restaurant dinners and hair cuts. In these markets, sellers sell similar, yet differentiated goods and services. It is relatively easy to enter and exit the market. Firms sell products with different quality and they have some market pricing power. Advertising (non-price competition) is somewhat important.

Oligopolies:

  • Domestic Airline travel and movie theaters. This is a market with a few large firms. In these markets, sellers sell similar, yet differentiated goods and services. It is expensive and difficult to enter and exit the market. Firms sell products with slightly different quality and while they can price their products or services below the competition, they often won't because it will be matched by their competitors and they will all earn lower profits.

Monopolies:

  • Tap water delivery and US Post Office, first-class mail. In a monopoly, a single firm sells the dominant share of the goods and services. The monopoly is protected by significant barriers to entry so it is either illegal, prohibitively expensive, or impossible for new firms to enter the market. These two examples are regulated government monopolies so the firm is not able to charge a monopoly price. In monopolies on pharmaceutical drugs, firms can charge a monopoly price, which is much higher than their marginal costs.

Monopsonies:

  • NASA in the 1960s. A monopsony is a market where a single buyer purchases the dominant share of the goods or services in the market. During the 1960s, many firms tried to build and sell rockets and rocket technology to NASA. NASA had monopsony power because these rockets were expensive so no other buyer was willing or able to purchase them. In modern times, NASA now competes as a buyer with the space agencies from around the world as well as private space travel companies. Amazon has some monopsony power over the book publishing market due to their large purchases. This allows them to negotiate a lower price with the sellers than in a competitive market structure.