Four market structures
| Perfect competition | Monopolistic competition | Oligopoly | Monopoly | |
|---|---|---|---|---|
| Number of sellers | Many | Many, no dominant seller | A few dominant sellers | One |
| Product | Homogeneous | Heterogeneous (differentiated) | Homogeneous or heterogeneous | No close substitute |
| Entry | Free | Easy | Difficult | Restricted |
| Price | Price taker | Price searcher | Price searcher; interdependent pricing | Price searcher |
| Competition | Price only | Price and non-price (advertising, branding, service) | Often non-price | Little |
- A price taker cannot affect the market price: its demand curve is horizontal.
- A price searcher faces a downward-sloping demand curve: to sell more it must lower its price.
- In an oligopoly each firm's pricing depends on how rivals react (interdependence).
Sources of monopoly power
- Government franchise or licence (e.g. a bus route franchise).
- Patents and copyrights.
- Control of an essential input.
- Natural monopoly: high set-up cost and economies of scale mean one firm can supply the whole market at a lower average cost; market demand is too small to support more than one firm.
Why competition matters
Compared with a competitive market, a firm with monopoly power tends to restrict output and charge a higher price, so total surplus is not maximised. Competition gives consumers lower prices, more choice and better quality.
Hong Kong's Competition Ordinance
| Rule | Prohibits | Example |
|---|---|---|
| First Conduct Rule | Agreements and concerted practices that harm competition | Price fixing, bid rigging, market sharing |
| Second Conduct Rule | Abuse of a substantial degree of market power | Predatory pricing to drive out rivals |
| Merger Rule | Mergers that substantially lessen competition | Applies to telecommunications carrier licence holders |
Exam tip: to identify a market structure, use the evidence in the case: the number and size of sellers, whether products are identical, and whether entry is easy.