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2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 10
Module 57

4. What You Will Learn in this Module
Explain the meaning and dimensions of market structure
Describe the four principal types of market structure—perfect competition, monopoly, oligopoly, and monopolistic competition
What You Will Learn in this Module
Section 10 | Module 57

5. Types of Market Structure
The way a product is supplied depends on how the industry is structured. Economists define four different market structures:
Perfect competition
Monopoly
Oligopoly
Monopolistic competition
Section 10 | Module 57

6. Types of Market Structure
How many Firms?
Type of product?
Section 10 | Module 57

7. Two necessary conditions for perfect competition
Firms are price-takers
Free entry and exit
Section 10 | Module 57

8. F Y I
What’s a Standardized Product?
A perfectly competitive industry must produce a standardized product. People must think that these products are the same.
Producers often go to great lengths to convince consumers that they have a distinctive, or differentiated, product even when they don’t.
So is an industry perfectly competitive if it sells products that are indistinguishable except in name but that consumer’s don’t think are standardized?
No. When it comes to defining the nature of competition, the consumer is always right.
Section 10 | Module 57

9. Monopoly
A monopolist is a firm that is the only producer of a good that has no close substitutes. An industry controlled by a monopolist is known as a monopoly.
Section 10 | Module 57

10. A monopoly industry has barriers to entry.
Control of a Scarce Resource or Input
Economies of scale
Technological superiority
Government created barriers
Section 10 | Module 57

11. Characteristics of an oligopoly industry include: a few large firms
An oligopoly is an industry characterized by a small number of large firms with some degree of market power.
Characteristics of an oligopoly industry include:
a few large firms
barriers to entry
interdependence
Section 10 | Module 57

12. Measuring Market Power
Four-firm Concentration Ratio (CR4): Add up the market share of the four largest firms in the industry.
Herfendahl-Hirschmann Index (HHI): The sum of the market shares, squared, for all firms in the industry.
Section 10 | Module 57

13. The HHI for Some Oligopolistic Industries
Section 10 | Module 57

14. Defining Monopolistic Competition
Large Numbers
Differentiated Products
Free Entry and Exit in the Long Run
Section 10 | Module 57

15. Market Structure
Section 10 | Module 57

16. Summary
There are four main types of market structure based on the number of firms in the industry and product differentiation: perfect competition, monopoly, oligopoly, and monopolistic competition.
In a perfectly competitive market all producers are price-taking producers and all consumers are price-taking consumers—no one’s actions can influence the market price.
There are two necessary conditions for a perfectly competitive industry: there are many producers, none of whom have a large market share, and the industry produces a standardized product or commodity. A third condition is often satisfied as well: free entry and exit into and from the industry.
Section 10 | Module 57

17. Summary
A monopolist is a producer who is the sole supplier of a good without close substitutes. An industry controlled by a monopolist is a monopoly.
Many industries are oligopolies: there are only a few sellers. In particular, a duopoly has only two sellers. Oligopolies exist for more or less the same reasons that monopolies exist, but in weaker form. They are characterized by imperfect competition: firms compete but possess market power.
Monopolistic competition is a market structure in which there are many competing producers, each producing a differentiated product, and there is free entry and exit in the long run.
Section 10 | Module 57