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

Answer 1

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

Oligopoly:

• 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

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