Question

Market Structure Summary Sheet
<-- --------Characteristics -------- -->						<-- --------Performance -------- -->
						Efficiency?		Economic Profit
Market Type	# of sellers	Mkt Conct. Ratio	Product Differentiation	Barriers to entry?	Gov. Reg. of Price?	Productive	Allocative	Short Run?	Long Run?	Example
Perfect Competition	Dozens to hundreds, too many for anyone to influence price		None, the firm sells an identical product, no advertising		None, firm is a "price taker"			Yes, only in short-run		Agriculture comes close
Monopolistic Competition	Many small sellers			Very low barriers, easy entry/exit					No, profits will be "competed away" by new firms	Local retail fast food, gasoline, hair stylists, etc.
Undifferentiated Oligopoly	Few sellers			High barriers	No govt. price regulation	No				Steel, contract construction
Differentiated Oligopoly	Few sellers					No, price not at min. of ATC				Beer, soft drinks, vehicles, etc.
Natural Monopoly Company	Only one seller				Yes, state/local govt. regulates price		Possible, depends on how price is regulated			Local electric power
Pure Monopoly	Only one seller				None, but firm has some pricing freedom					Alcoa (historic) many firms in small, local mkts.

Fill in the empty spaces. Then, choose one of the six market types and in a paragraph, create a fictional company explaining the main characteristics and performance aspects of your chosen market type.

Answer 1

Perfect Competition

Market Concentration ratio: Zero/very small; Barriers to entry: None; Productive: Yes(P=MC); Allocative: Yes (high); Long Run Profit: Zero.

Monopolistic Competition  

Market Concentration ratio: Small (less than 40%); Product Differentiation: High (differentiated products); Govt Regulation of price: No; Barriers to entry: None; Economic: No (P>MC); Allocative: No (production below capacity); Long Run Profit: Normal profit (supernormal profit eaten away by new firms).

Undifferentiated Oligopoly

Market Concentration ratio: High (more than 60%); Product Differentiation: No (standardized products); Allocative: No (P>MC; output< min AC output level); Short Run Profit: positive profits, losses, or breaking even; Long Run Profit: positive profits, or breaking even (supernormal profit as long as there is barrier to entry).

Differentiated Oligopoly

Market Concentration ratio: High (more than 60%); Product Differentiation: Yes (differentiated products); Barriers to entry: Present; Govt Regulation of price: Yes; Allocative: No; Short Run Profit: High (Abnormal profit); Long Run Profit: Normal profit/High Profit (High profit due to barriers to entry).

Natural Monopoly Company

Market Concentration ratio: Very High (100%); Product Differentiation: No (single product); Barriers to entry: Present (Very rigid); Productive: Yes when AC declining, No when fixed costs/sunk costs high; Short Run Profit: Abnormal profit/Losses ; Long Run Profit: High (LRAC is falling).

Pure Monopoly   

Market Concentration ratio: Very High (100%); Product Differentiation: No (single product); Barriers to entry: Present (Very rigid); Productive: No (x-inefficiency); Allocative: No (P>MC); Short Run Profit: High profit/Losses ; Long Run Profit: Zero/Normal Profit.

Suppose we take the company: Indian Railways. Indian Railway is an quintessential example of a natural monopoly. This is because there is high fixed cost, sunk cost, high barriers to entry, govt control of price, no close substitute, it is the price maker. Moreover, there is the element of economies of scale i.e., the costs goes down as the output increases. Lastly, there is price discrimination of 2nd and 3rd type.