Understanding Market Structures and Economic Competition

Market Structures

Pure competition is a theoretical market structure with three necessary conditions: very large numbers of buyers and sellers, identical products, and freedom of entry and exit.

Market structure is a classification that describes the nature and degree of competition among firms in the same industry.

Monopolistic competition is a market structure that has all of the conditions of pure competition except for identical products. Because a monopolistic competitor faces competition from a large number of firms in its industry, it must somehow convince consumers that its products are better than the products produced by other firms.

Types of Monopolies

• Natural monopoly: A situation in which a single firm can produce the product more cheaply than any number of competing firms could.
• Geographic monopoly: A monopoly based on the absence of other sellers in a certain geographic area.
• Technological monopoly: A monopoly based on ownership or control of a manufacturing method, process, or other scientific method.
• Government monopoly: A monopoly owned and operated by the government.

Market Failures

Common market failures include:

• Not enough competition.
• Not enough information.
• Resources that cannot, or will not, move.
• Too few public goods.
• Externalities or spillover effects.

Spillover effects are uncompensated side effects that either benefit or harm a third party not involved in the activity that caused it.

Cost-benefit analysis: A calculation that compares the cost of an action to its benefit.

Regulation and Business Practices

Trusts: Illegal combinations of corporations or companies organized to suppress competition.

Restrained: Limited the activity or growth of.

Price discrimination: The practice of charging different customers different prices for the same product.

Cease and desist order: A ruling requiring a company to stop an unfair business practice that reduces or limits competition.

Economies of scale: A situation in which the average cost of production falls as the firm gets larger.

Public disclosure: A requirement forcing a business to reveal information about its products or its operations to the public.

Mortgage: A legal document that pledges ownership of a home to a lender as security for repayment of borrowed money.

Foreclosure: The process in which a lender reclaims the property due to a lack of payment by the borrower.