1. Industry Structure & Public Policy
“I don’t think it’s right that only one company gets to make
the game Monopoly.”
Steven Wright
Comedian
EIGHT

2. In this chapter: Industry Structure & Public Policy
Meaning of ‘industry structure”
Characteristics of the four structures
Market power
Why firms behave the way the do

3. Makeup of an industry as defined by certain factors:
Industry Structure
Industry Structure
Makeup of an industry as defined by certain factors:
Number and size distribution of sellers
Nature of the product
Barriers (or lack of barriers) to entry and exit
These factors determine whether a firm has market power, ability to set price.

4. Industry Structure (Four Types)
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Number Sellers
Many, many, many sellers – small relative to industry (too small to matter)
Many sellers – small relative to industry
Few sellers (usually 3to4) – large relative to industry
One seller
Nature of Product
Barriers to Entry/Exit
Examples

5. Industry Structure (Four Types)
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Number Sellers
Many, many, many sellers – small relative to industry (too small to matter)
Many sellers – small relative to industry
Few sellers (usually 3to4) – large relative to industry
One seller
Nature of Product
Homogeneous (identical)
Heterogeneous
(differentiated)
Could be homogeneous or heterogeneous
Unique, no close substitutes
Barriers to Entry/Exit
Examples

6. Industry Structure (Four Types)
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Number Sellers
Many, many, many sellers – small relative to industry (too small to matter)
Many sellers – small relative to industry
Few sellers (usually 3to4) – large relative to industry
One seller
Nature of Product
Homogeneous (identical)
Heterogeneous
(differentiated)
Could be homogeneous or heterogeneous
Unique, no close substitutes
Barriers to Entry/Exit
None
None to Low
Medium to High
High
Examples

7. Industry Structure (Four Types)
Pure Competition
Monopolistic Competition
Oligopoly
Monopoly
Number Sellers
Many, many, many sellers – small relative to industry (too small to matter)
Many sellers – small relative to industry
Few sellers (usually 3to4) – large relative to industry
One seller
Nature of Product
Homogeneous (identical)
Heterogeneous
(differentiated)
Could be homogeneous or heterogeneous
Unique, no close substitutes
Barriers to Entry/Exit
None
None to Low
Medium to High
High
Examples
Agriculture, stock market
Restaurants, gas stations, hair salons
Cigarettes, soft drinks, airlines
Duke Power, Time Warner Cable, Charlotte Observer
Which do you suppose has most market power? Ability to set price? WHY?

8. Market power (and ability to set price) is highest when:
Number of sellers is smaller
With many sellers, setting price too high will drive consumers away from you to lower priced rivals.
Product is differentiated
If products are close substitutes, consumers are more likely to be driven away because you aren’t the only game in town.
Barriers to entry/exit are high
If barriers are low, profits will attract more firms into the industry, lowering profits and driving price down.

9. Firm Behavior Due to Industry Structure
Monopolistic Competition
Examples: Restaurants, convenience stores, gas stations, nail shops, hair salons.
Part “monopoly”, part “competition”:
Monopoly because it is selling a unique product.
Competition because there are lots of close substitutes.
Considered inefficient by economists because of “excess capacity”
The Thai restaurant on WT Harris usually has more tables than they need. But at peak times they can fill every seat. Most of the time they have excess capacity.
Economists don’t mind the inefficiency in this case because it provides variety of consumption, increases social welfare.
Imagine what would happen if there was no excess capacity in restaurant market . . .

10. Firm Behavior Due to Industry Structure
Oligopoly
Examples: Soft drinks, airlines, athletic shoes, beer, cigarettes, satellite TV.
High market power, but not free to change price:
Oligopolists have high market share because there are so few firms in the industry (Coke, Pepsi and Cadbury Schweppes have 90% of market)
A big player cannot change their price without first considering what their rivals will do in response:
What will they do if I raise price?
What if I lower my price?
Olgipolies are characterized by non-price rivalry:
Tend to see oligopolists advertise without mentioning price – usually quality, convenience, taste-tests, sex appeal . . .

11. Firm Behavior Due to Industry Structure
Monopoly
Examples: Charlotte Observer, Duke Power, Pharmaceutical companies over certain drugs, the only dry cleaner in a small town.
Firms can be natural monopolies:
If one firm can produce a very large quantity of a good at a lower average cost per unit than several firms, the government may allow them to be a monopoly and erect high barriers to keep rivals out.
Example: Duke Power, Pharmaceuticals

12. Industry Structure & Public Policy
Key Terms:
Barriers to entry
Collusion
Heterogeneous
Homogeneous
Industry structure
Monopolistic competition
Monopoly
Natural monopoly
Oligopoly
Perfect competition