Market Structures and Market Failures
Market Structures and Market Failures
MARKET STRUCTURES
AND
MARKET FAILURES
WHAT HAPPENS WHEN MARKETS DO NOT
WORK PERFECTLY?
Objectives:
Explain the characteristics that define market structure.
Compare the behavior of firms and buyers in perfect competition, monopoly, oligopoly, and monopolistic competition.
Synthesize information from industry case studies and categorize those industries by market structure.
Apply the four characteristics of market structures to determine the market structure of a particular industry.
Explain why externalities occur and describe the problem of public goods.
WHAT IS PERFECT COMPETITION, AND WHY DO ECONOMISTS LIKE IT SO MUCH?
Businesses operate in different market structures, which are primarily defined by the degree of competition among producers.
Four characteristics are used to categorize market structures:
number of producers
similarity of products
ease of entry
control over prices
Perfect competition includes these beneficial characteristics:
many producers and consumers
identical products
easy entry into the market
prices determined by supply and demand
consumers have easy access to information about products and prices
producers are forced to be as efficient as possible
consumers always get to pay the equilibrium price.
WHAT IS A MONOPOLY, AND WHY ARE SOME MONOPOLIES LEGAL?
Monopolies, oligopolies, and monopolistic competition do not allocate resources efficiently.
a monopoly is a market in which a single producer provides unique products. It usually has significant control over prices and less incentive to satisfy consumers, making it the opposite of perfect competition. Monopolies are often illegal, although governments may allow beneficial monopolies to exist.
WHAT IS MONOPOLISTIC COMPETITION, AND HOW DOES IT AFFECT MARKETS?
Monopolistic competition is a market in which many producers provide similar but varied goods. Such markets are characterized by both price and non-price competition, in which firms compete through differentiated product characteristics, service, location, and brand image.
To the extent that firms are able to monopolize their own brands, they may have some control over prices. However, such markets remain relatively competitive.
MARKET FAILURES: WHAT ARE EXTERNALITIES AND PUBLIC GOODS?
When markets do not allocate goods and services efficiently, economists refer to them as market failures. Market failures include the three imperfect market structures discussed above:
Monopoly
Oligopoly
Monopolistic competition
Market failures also include externalities and public goods:
Externalities are spillover costs or benefits that affect someone other than the producer or consumer. Negative externalities, such as pollution, tend to happen because producers are not paying the full cost of their actions (their neighbors also pay). Positive externalities have the opposite problem - they are under produced. Why pay for a flu shot if most of the others in your community already received one?
Public goods are available for everyone to consume, whether or not those people pay for them, and are defined as being non-excludable and non-rival in consumption. The market fails to provide public goods because private firms cannot make people pay for their use (the free-rider problem); thus the government must provide them.
WHAT IS AN OLIGOPOLY, AND HOW DOES IT LIMIT COMPETITION?
An oligopoly is a market in which a small number of producers provide similar, but not identical, goods. Firms in an oligopoly have some control over prices but often set them in response to the decisions of other firms. Because an oligopoly dominates the market, its effect may be much like that of a monopoly. Illegal collusion may occur, and cartels may be created.