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 of Good Homogeneous Slightly Differentiated Differentiated or Homogeneous Unique Level of Barriers to Entry None Low High High Level of Information Perfect Imperfect Imperfect Imperfect Strategies Nil Product Development, Branding, Advertising, Price War, Joint Ventures, 3DPD, Relocation, Cognitive Bias Strategy Product Development, Product Innovation, Branding, Advertising, Collusion, Merger, Predatory Pricing, Limit Pricing, Price War, Joint Ventures, Process Innovation, 3DPD, Diversification, Relocation, Cognitive Bias Strategy Product Development, Product Innovation, Branding, Advertising, Acquisitions, Predatory Pricing, Limit Pricing, Joint Ventures, Process Innovation, 3DPD, Diversification, Relocation, Cognitive Bias Strategy Profits (Firms) Normal Profits: If firms are making supernormal profits, the lack of barriers to entry allows other firms to compete on equal basis, increasing supply and decreasing market share and hence average revenue until AR = AC. If firms are making subnormal profit, they will eventually be unable to sustain losses and shut down, decreasing supply and increasing market share of firms which sustain themselves until AR = AC. Thus, in the long run, PC firms produce at the minimum level of revenue allowing them to sustain themselves. Normal Profits: (Same explanation as PC firms) If firms are making supernormal profits, new firms will enter the industry, reducing each firm’s market share and AR falls. Moreover, there is greater availability of close substitutes in the market so demand for the individual firm’s goods becomes more price elastic. Thus, in the long run, demand will fall and become more price elastic until AC = AR. Supernormal Profits: Assuming the oligopolist makes supernormal profits in the short run by setting high prices and restricting output, it will continue to make supernormal profit in the long run due to high barriers to entry preventing new firms from competing on equal basis for a share of the profits. Supernormal Profits: Assuming the monopolist makes supernormal profits in the short run by setting high prices and restricting output, it will continue to make supernormal profit in the long run due to high barriers to entry preventing new firms from competing on equal basis for a share of the profits. Variety (Consumer) None High Some None

Innovation/Quality (Firms) Unwilling and unable Willing but unable Willing and able May be willing, definitely able Level of Consumer Welfare/Equity (Consumer) Maximum High Low Lowest Efficiency (Firms and Consumers) Allocatively Efficient, Productively Efficient, Dynamically Inefficient Almost Allocatively Efficient, Productively Efficient, Dynamically Inefficient Allocatively Inefficient, Potentially Productively Inefficient, Dynamically Efficient Allocatively Inefficient, Potentially Productively Inefficient, Dynamically Efficient Market characteristics in least words possible 1) In a Monopoly/Collusive Oligopoly, imperfect information and high barriers to entry allows the monopolist to be the sole seller of a unique product . 2) In a Competitive Oligopoly, imperfect information and high barriers to entry allows the existence of a few dominant firms selling differentiated products . 3) In a Monopolistically Competitive market, imperfect information and low barriers to entry allows the existence of many firms selling differentiated products . 4) In a Perfectly Competitive market, perfect information and the absence of barriers to entry allows the existence of many firms selling homogeneous products . a) ‘Slightly Differentiated’ means close substitutes. After all, they are in the same market selling the same type of product. ‘Homogenous’ means perfect substitutes – In PC or Collusive Oligopoly. This means they are selling literally the same goods. There is no difference whatsoever. General Paragraph structure When writing paragraphs, use this framework. Characteristics/Market Changes (Cause) → Behaviour (Response/Effect) → Performance (Effect) ● Behaviour can be split into natural economic forces and firm strategies ○ Firm strategies can be split into pricing and non-pricing strategies

* Note: Depending on the question, sometimes some components can be left out. (e.g. Core EQ 1a which only asked for shut-down conditions. Behaviour can be left out because the only behaviour concep