Four Market Models[pic]
From most competitive to least competitive:
Pure Competition: • Involves very large numbers of firms producing identical products. • Standardized product (a product identical to that of other producers--ex. corn or cucumbers). o no attempt to advertise or differentiate • Free Entry and Exit: no significant legal, technological, financial, or other obstacles prohibiting new firms from selling their output in any competitive market • No control over the price: "Price Takers" • (i.e. the firms have no market power) . o The individual firm has very little to no impact on the market. • Demand is perfectly elastic.
Maximizes productive and allocative efficiency. • ex. Agriculture • pure competition markets do not actually exist.
Note: Pure competition does not actually exist in our society, and the agriculture industry is the closest industry to being purely competitive. The pure competition model is used as a standard to evaluate the efficiency of our economy (something to compare to and help our understanding of economy.)
Monopolistic Competition: • Involves large number of firms, but not as many as in pure competition. • Produces differentiated products (ie. clothing, furniture, books) o Nonprice competition - a selling strategy in which firms try to distinguish their product or service on the basis of attributes such as design and workmanship (product differentiation) o Focuses mostly on advertising, brand names, and trademarks • Firms can easily enter or leave this market, although not as easily as firms in a purely competitive market. • Imperfect Competition. • Limited control over prices o ex. retail trade, dresses, shoes
Oligopoly: • Involves a few firms that exert considerable influence over the industry •