Four Principle Models for Market Structure:
1. Perfect Competition
a. Many producers each sell an identical product. (Supply and Demand Model not
universally valid) Complete opposite of monopoly.
a. A single producer sells a single, undifferentiated product.
a. A few producers, not a lot, sell products that may be either identical or
4. Monopolistic Competition
a. Many producers each sell differentiated product.
System of Market Structure is based on 2 dimensions:
1. The number of producers in the market (one, few, many)
2. Whether the goods offered are identical or differentiated.
Why do Chapter 13
Monopolists Exists? (Barrier to entry)
1. Control of a Scarce Resource or Input
2. Increase Returns to Scale
a. When the average total cost falls as output increases, firms tend to grow larger
b. Larger companies are more profitable and drive out smaller ones.
c. Natural monopoly: when increasing returns to scale provide a large cost
advantage to a single firm that produces all of an industry’s output.