Principles of Microeconomics / Unit 9 MIC 0832 worked example, 60 to 90 seconds
Classifying a Market Structure
The idea
From a description, read four features: how many firms, whether products are identical or differentiated, how easy entry is, and how much control each firm has over price. Many firms, identical products, free entry, no price control is perfect competition. Many firms, differentiated products, easy entry, some control is monopolistic competition. A few firms, high barriers, interdependent pricing is oligopoly. One firm, blocked entry, no close substitutes is monopoly. Then say which demand curve the firm faces and what happens to profit in the long run.
In practice
Worked example: hundreds of farms selling an identical grade of wheat with easy entry is perfect competition; the firm's demand is flat and long-run profit is zero. Dozens of coffee shops with different menus and easy entry is monopolistic competition; the demand slopes down and long-run profit is zero. Three wireless carriers behind spectrum licenses is oligopoly; each watches the others and profit can persist. One licensed water utility is monopoly; demand is the market's and profit persists behind the barrier.
Where people slip
The number of firms alone misleads: a few firms with easy entry behave competitively, and many firms with differentiated products are not perfect competitors. And ask about the long run: persistent profit is the mark of a barrier.
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