Your street has your shop, maybe a few classmates' shops, and Common Grounds across the road. Which of the four textbook markets is that? The answer decides how much say you have over your own price.
Learning objectives. After this week you can (1) name the four market structures; (2) say how much price power a firm has in each; and (3) read your market share and place your street among the four.
Remember this: fewer sellers and more different products mean more power over price.
1) The four structures
- Perfect competition: many firms, an identical product, free entry and exit. Each firm is a price taker: it accepts the market price.
- Monopolistic competition: many firms with differentiated products (taste, ambiance, brand), so each has some control over its price.
- Oligopoly: a few firms whose decisions are interdependent. Two firms make a duopoly.
- Monopoly: one seller, no close substitutes, high barriers to entry. A price maker.
| Structure | Number of firms | Barriers to entry | Price power |
|---|---|---|---|
| Perfect competition | Very many | Very low | None (price taker) |
| Monopolistic competition | Many | Low | Some |
| Oligopoly / duopoly | A few / two | High | Considerable, interdependent |
| Monopoly | One | Very high | Most (price maker) |
As the number of firms falls toward one, price power generally rises.
2) Market share
Market Share = firm's sales ÷ total market sales × 100
Sell 60 of a market's 100 cups and your share is 60 ÷ 100 × 100 = 60%. Two firms split 50/50 hold equal shares.
Your report prints Market share for you: the share of the people passing your shop who chose it. That total also counts people who went to Common Grounds or a classmate, and people who skipped coffee.
3) Where your street fits
Shops differ in beans, ambiance and reputation, so each has some power over its price, like monopolistic competition. But there are only a few sellers, and each one's price moves the others' customers, like an oligopoly. If your street is just you and Common Grounds, it is a duopoly.
Quick self-check
(a) You sell 60 cups and the rival sells 40. What is your share? (b) Hundreds of farms sell identical wheat and none can move the price. Which structure? (Answers: 60%; perfect competition.)
Common mistakes
- Mixing up the names. Monopolistic competition has many firms; a monopoly has one.
- Thinking a price taker sets its price. It accepts the market's.
- Forgetting the rival. Common Grounds is in your market every day.
This week in the arena
Write down your Market share and Common Grounds' latte price from each Daily Report this week. When the rival's price changed, did your share move? That link between their price and your customers is the interdependence that defines an oligopoly.