KRUGMAN'SMICROECONOMICS for AP*

Introduction to Market Structure

Margaret Ray and David Anderson

Micro:

Econ:

21

57

Module

What you will learnin this Module:

• The meaning and dimensions of market structure.

• The four principal types of market structure—perfect competition, monopoly, oligopoly, and monopolistic competition.

Market Structures

•The way a product is supplied depends on how the industry is structured. Economists define four different market structures; perfect competition, monopoly, oligopoly, and monopolistic competition.

Defining Market Structures

• How many Firms?

• Type of product?

Perfect Competition

• Two necessary conditions for perfect competition

• Firms are price-takers

• Free entry and exit

Monopoly

• A monopolist is a firm that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly.

• A monopoly industry has barriers to entry.

• Ownership of essential resources

• Economies of scale

• Technological superiority

• Government created barriers

Oligopoly

• An oligopoly is an industry characterized by a small number of large firms with some degree of market power.

• Characteristics of an oligopoly industry include;

• a few large firms

• barriers to entry

• interdependence

Measuring Market Power

• Four-firm Concentration Ratio (CR4): Add up the market share of the four largest firms in the industry.

• Herfendahl-Hirschmann Index (HHI): The sum of the market shares, squared, for all firms in the industry.

Monopolistic Competition

• Monopolistic competition is a market structure characterized by

• Many firms

• Differentiated product

• No barriers to entry/exit