Market Structures Comparison Notes

Perfect Competition Monopolistic Competition Competitive Oligopoly Monopoly/Collusive Oligopoly Number of Sellers and Buyers Very Many Sellers Each seller has insignificant market share ⇒ insignificant market power Price taker : price and output they set is determined by changes in demand and supply ● Individual demand curve d PC is perfectly price elastic i.e. |PED| = ∞ due to products being perfect substitutes ○ Increase in price leads to losing all of its market share; No incentive to decrease its price as it can sell all its output at market price. If the firm changes its price, TR falls. ● d PC = AR PC = MR PC = P PC Many Sellers Each firm has small market share ⇒ limited market power Price setter : is able to change its price without losing all of its customers (though it will lose a large proportion) ● Individual demand curve d MC is downward sloping and price elastic i.e. |PED| > 1 due to competitor firms’ products being relatively close substitutes ○ Decrease in price leads to proportionately greater increase in quantity (vice versa) demanded as consumers will buy the cheapest of the substitutes in consumption d M = AR M = P M = 2MR M (the MR curve is twice as steep as the AR curve) A few Dominant Sellers Each firm has high market share ⇒ high market power ⇒ price setter ⇒ firms decisions significantly affect rival firms ⇒ mutual interdependence ⇒ price rigidity ● Kinked individual demand curve D O due to firms selling relatively close substitutes ○ |PED| > 1 above P 0 : Increase in price will not be followed by rival firms as most customers will switch to cheaper substitutes sold by rival firms, leading to proportionately greater loss in quantity demanded ○ |PED| < 1 below P 0 : Decrease in price will be followed by rival firms to minimise loss in market share, leading to proportionately smaller increase in quantity demanded ● MR curve has a discontinuous section ○ Any slight movement in the MC curve is unlikely to result in a change in price Sole Seller The monopolist has complete market share ⇒ high market power Price setter : price OR output of the market is set by the monopolist (the monopolist can NEVER set both output and price.) ● The monopolist’s demand curve d M is the industry’s demand curve and is price inelastic i.e. |PED| < 1 due to a lack of available close substitutes ○ Increasing its price leads to proportionately lower fall in quantity demanded (vice versa) as consumers cannot turn to a close substitute d M = AR M = P M = 2MR M (the MR curve is twice as steep as the AR curve) Nature o