Competition and Market Structures
Definitions and Basics
Competition, from the Concise Encyclopedia of Economics
“Competition,” wrote Samuel Johnson, “is the act of endeavoring to gain what another endeavors to gain at the same time.” We are all familiar with competition—from childhood games, from sporting contests, from trying to get ahead in our jobs. But our firsthand familiarity does not tell us how vitally important competition is to the study of economic life. Competition for scarce resources is the core concept around which all modern economics is built….
What are Market Structures? An Economics Topic Detail, by Arnold Kling
Market structures, or industrial organization, describe the extent to which markets are competitive. At one extreme, pure monopoly means that there is only one firm in an industry. At the other extreme, economists describe a theoretical possibility termed perfect competition. In between are the market structures found most often in the real world, which are oligopoly and monopolistic competition.
Competition and Market Structure: A Video and Quiz from EconEdLink
Monopoly, from the Concise Encyclopedia of Economics
A monopoly is an enterprise that is the only seller of a good or service. In the absence of government intervention, a monopoly is free to set any price it chooses and will usually set the price that yields the largest possible profit. Just being a monopoly need not make an enterprise more profitable than other enterprises that face competition: the market may be so small that it barely supports one enterprise. But if the monopoly is in fact more profitable than competitive enterprises, economists expect that other entrepreneurs will enter the business to capture some of the higher returns. If enough rivals enter, their competition will drive prices down and eliminate monopoly power….
The main kind of monopoly that is both persistent and not caused by the government is what economists call a “natural” monopoly. A natural monopoly comes about due to economies of scale—that is, due to unit costs that fall as a firm’s production increases. When economies of scale are extensive relative to the size of the market, one firm can produce the industry’s whole output at a lower unit cost than two or more firms could. The reason is that multiple firms cannot fully exploit these economies of scale. Many economists believe that the distribution of electric power (but not the production of it) is an example of a natural monopoly. The economies of scale exist because another firm that entered would need to duplicate existing power lines, whereas if only one firm existed, this duplication would not be necessary. And one firm that serves everyone would have a lower cost per customer than two or more firms.
The Costs and Benefits of Monopoly, at Marginal Revolution University
Timothy Taylor, The Blurry Line Between Competition and Cooperation, Econlib, February 2015.
What is the opposite of “competition”? If you fear that this is a trick question and run off to check a synonym/antonym dictionary, you will find an answer that probably came to mind in the first place: “cooperation.” Indeed, many people view economics as morally suspect because they perceive economics as emphasizing competition, rather than the arguably more virtuous approach of cooperation.
Industrial Concentration, from the Concise Encyclopedia of Economics
Industrial concentration occurs when a small number of companies sell a large percentage of an industry’s product. The most widely used measure of concentration is the so-called four-firm concentration ratio, which is the percentage of the industry’s product sold by the four largest producers. If, for example, four firms each sell 10 percent of an industry’s product, the four-firm concentration ratio for that industry is 40 percent….
In the News and Examples
Teaching Market Structures with a Competitive Gum Market, from EconEd at the St. Louis Fed
In this lesson, students participate in an activity that demonstrates a key economic idea: The level of competition in an industry is a major determinant of product prices. Students are placed in groups that replicate four competitive conditions—perfect competition, monopoly, competitive oligopoly, and collusive oligopoly. Students act as firms in each industry competing to sell their product to the teacher (acting as a consumer).
In Defense of Apple, by Richard McKenzie at Econlib, July 2012.
Richard McKenzie examines the 2012 antitrust case against Apple, providing a defense of the tech company based on antitrust enforcers misunderstanding of monopoly theory.
Antitrust, from the Concise Encyclopedia of Economics
Before 1890 the only “antitrust” law was the common law. Contracts that allegedly restrained trade (price-fixing agreements, for example) often were not legally enforceable, but such contracts did not subject the parties to any legal sanctions. Nor were monopolies generally illegal. Economists generally believe that monopolies and other restraints of trade are bad because they usually have the effect of reducing total output and, therefore, aggregate economic welfare (see Monopoly). Indeed, the term “restraint” of trade indicates exactly why economists dislike monopolies and cartels. But the law itself did not penalize monopolies. The Sherman Act of 1890 changed all that. It outlawed cartelization (every “contract, combination… or conspiracy” that was “in restraint of trade”) and monopolization (including attempts to monopolize)….
Don Boudreaux on Market Failure, Government Failure and the Economics of Antitrust Regulation. EconTalk podcast episode, October 1, 2007.
Don Boudreaux of George Mason University talks with EconTalk host Russ Roberts about when market failure can be improved by government intervention. After discussing the evolution of economic thinking about externalities and public goods, the conversation turns to the case for government’s role in promoting competition via antitrust regulation. Boudreaux argues that the origins of antitrust had nothing to do with protecting consumers from greedy monopolists. The source of political demand for antitrust regulation came from competitors looking for relief from more successful rivals.
A Little History: Primary Sources and References
Under the rule of individual property, the division of the produce is the result of two determining agencies: Competition, and Custom. It is important to ascertain the amount of influence which belongs to each of these causes, and in what manner the operation of one is modified by the other.
Political economists generally, and English political economists above others, have been accustomed to lay almost exclusive stress upon the first of these agencies; to exaggerate the effect of competition, and to take into little account the other and conflicting principle. They are apt to express themselves as if they thought that competition actually does, in all cases, whatever it can be shown to be the tendency of competition to do. This is partly intelligible, if we consider that only through the principle of competition has political economy any pretension to the character of a science….
Steven Horwitz, Competition and Entrepreneurship: The Fountainhead of the Contemporary Austrian School, Econlib, December 2020.
One way of seeing the contribution of Competition and Entrepreneurship, and Kirzner’s work on entrepreneurship more generally, is that he provided a Misesian solution to a Hayekian problem…The Hayekian problem was how to explain the process of social learning that led to the coordination that characterized equilibrium. What ensured that the tendency toward equilibrium would be effective? The answer Kirzner offered was to take from Mises the idea of the entrepreneurial element of human action- the idea that we are not just maximizers but active agents who do not take our means-ends frameworks as given, and to make entrepreneurship the prime mover of the market process. Kirzner argued that the process of plan coordination is set in motion by entrepreneurial alertness to hitherto unseen opportunities, the exploiting of which constitutes the competitive market process.
Garret Edwards, Competition as a Discovery Procedure: Smith, Hayek, and Leoni, AdamSmithWorks, May 19, 2021.
‘Competition is thus, like experimentation in science, first and foremost a discovery procedure. […] Competition as a discovery procedure must rely on the self-interest of the producers, that is it must allow them to use their knowledge for their purposes, because nobody else possesses the information on which they must base their decision.’ But what does that really tell us about competition? How is competition relevant in discovering new ways to improve our everyday lives? Is it possible that competition ends up being useful for entrepreneurs to innovate even when government regulations get in the way?
Non-market activity within the family: Gary Becker, biography from the Concise Encyclopedia of Economics
One of Becker’s insights was that a major cost of investing in education is one’s time. Possibly that insight led him to his next major area, the study of the allocation of time within a family. Applying the economist’s concept of opportunity cost, Becker showed that as market wages rose, the cost to married women of staying home would rise. They would want to work outside the home and economize on household tasks by buying more appliances and fast food….
Shedding Light on Market Power, by Morgan Rose at Econlib.
How should government react to firms with too much supposed market power? How ought barriers to entry be dealt with?
Why Predatory Pricing is Highly Unlikely, by David Henderson at Econlib, May 2017.
A widely held belief is that large firms with some market power can use their profits generated in particular markets to cut prices below costs in another market and drive out their competitors. Then, according to this belief, once the competitors are driven out, the large firms can raise their prices in that market and collect higher-than-competitive prices.
There are two problems with this view. First, it is logically deficient. Second, there is little evidence to support it.
Is Market Failure a Sufficient Condition for Government Intervention?, by Art Carden and Steven Horwitz at Econlib, April 2013.
Externality problems are market ‘failures’ only in comparison to the perfectly competitive model’s equilibrium. In other words, the ‘failure’ here is not that markets ‘do not work’ in practice, but that they fail to live up to a blackboard ideal.