e have now examined two
“pure” market structures.
At one extreme is perfect competition, a market structure in which many firms, each small relative to the size of the market, produce undifferentiated products and have no market power at all. Each competitive firm takes price as given and faces a perfectly elastic demand for its product. At the other extreme is pure monopoly, a market structure in which only one firm is the industry. The monopoly holds the power to set price and is protected against competition by barriers to entry. Its market power would be complete if it did not face the discipline of the market demand curve.
Even a monopoly, however, must produce a product that people want and are willing to pay for.
Most industries in the United States fall somewhere between these two extremes. In this chapter, we focus on two types of industries in which firms exercise some market power but at the same time face competition. One type, monopolistic competition, differs from perfect competition only in that firms can differentiate their products. Entry to a monopolistically competitive industry is easy, and each industry is made up of many firms. The other type, oligopoly, is a broad category that covers many kinds of firm behavior and industry structure. An oligopoly is an industry comprising a small number of competitors; each firm in an oligopoly is large enough to have some control over market price, but beyond that the character of competition varies greatly from industry to industry. An oligopoly may have 2 firms or 20, and those firms may produce differentiated or undifferentiated products.
Thus far we have defined four types of market or industry structure. These are important because how firms within any industry behave depends upon how that industry is organized—whether there are
