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Managerial economics - what are the 4 market models and examples?


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January 24, 2011 12:37PM

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).
    • 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) .
    • 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)
    • 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)
    • 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
    • ex. retail trade, dresses, shoes


  • Involves a few firms that exert considerable influence over the industry
  • Produces either standardized or differentiated products.
  • NONPRICE COMPETITION: emphasis on product differentiation
  • Existing firms are strong rivals and affects each other's price and output.
  • Control over price limited by mutual interdependence; considerable with collusion (the decision of rivals).
  • Harder for a firm to enter or exit.
  • Imperfect competition.
  • A great deal of nonprice competition, especially with differentiated products
    • ex. steel, automobiles, household appliances

Pure Monopoly:

  • Only one firm is involved.
  • Products are unique with no substitutes.
  • NONPRICE COMPETITION: mostly public relations
  • Entry of additional firms is not possible--one firm constitutes the entire industry.
  • Entry to the industry is often blocked by government. It requires patent or licenses.
  • Since the monopolist produces a unique product, it makes no effort to differentiate its product.
  • Imperfect Competition.
  • There is total control over price "Price Makers"
    • ex. local electric utility
    • Oil, John D. Rockefeller
    • diamonds