The two market structures that we have studied so far—perfect
competition and monopoly—are polar cases; they define the two extremes
of a firm’s market power within an industry. Under perfect competition,
firms are price takers, price is equal to marginal cost, and economic
profits in the long run are zero. Under monopoly, the firm is a price
setter, it sets price above marginal cost, and it can earn positive economic
profits in the long run if there are sufficient entry barriers.
Although they provide crucial insights for understanding some industries,
these two polar cases are insufficient for understanding the behaviour of
all firms. Indeed, most of the products that we easily recognize—
swimsuits, cellphones, jeans, hamburgers, sunglasses, perfume, running
shoes, computers, breakfast cereals, and cars, to name just a few—are
produced by firms that have considerable market power yet are not
monopolists.
This chapter discusses market structures that lie between these two polar
cases of perfect competition and monopoly. Before discussing the theory,
however, we turn to a brief discussion of the prevalence of these
“intermediate” market structures in developed economies, including
Canada.
5. provide examples of the nature of the competition among
oligopolists and the most common entry barriers.