Section 10 explained how factors including the number
of firms in the industry, the type of product sold, and the
existence of barriers to entry determine the market power
of firms. We learned about the four basic market structures—
perfect competition, monopoly, oligopoly, and monopo-
listic competition. We can think about these structures
as falling along a spectrum from perfect competition at
one end to monopoly at the other, with monopolistic
competition and oligopoly lying in between. To shed
more light on the market structure spectrum, consider
two very different markets introduced in previous sec-
tions: the market for organic tomatoes and the market
for diamonds.
In the United States, a growing interest in healthy living
has steadily increased the demand for products such as or-
ganically grown fruits and vegetables. Over the past
decade, the markets for these products have been healthy
as well, with an average growth rate of 20% per year. It costs
a bit more to grow crops
without chemical fertilizers
and pesticides, but con-
sumers are willing to pay
higher prices for the benefits
of fruits and vegetables
grown the natural way. The
farmers in each area who pio-
neered organic farming tech-
niques had little competition
and many prospered thanks
to these higher prices.
But with profits as a lure
for expanded production, the
high prices were unlikely to
persist. Over time, farmers al-
ready producing organically
would increase their capacity,
and conventional farmers
would enter the organic food fray, increasing supply and
driving down price. With a large and growing number of
buyers and sellers, undifferentiated products, and few bar-
riers to entry, the organic food market increasingly resem-
bles a perfectly competitivemarket.
In contrast, the market for diamonds is dominated by
one supplier, De Beers. For generations, diamonds have
been valued not just for their attractive appearance, but
also for their rarity. But geologists will tell you that dia-
monds aren’t all that rare. In fact, they are fairly common
and only seem rare compared to other gem-quality stones.
This is because De Beers makesthem rare: the company
controls most of the world’s diamond mines and limits the
quantity supplied to the market. This makes De Beers re-
semble a monopolist,the sole (or almost sole) producer of a
good. Because De Beers controls so much of the world’s di-
amond supply, other firms have considerable difficulty try-
ing to enter the diamond market and increase the quantity
of the gems available.
In this section we will
study how markets like
those for organic tomatoes
and diamonds differ, and
how these markets respond
to market conditions. We
will see how firms posi-
tioned at opposite ends of
the spectrum of market
power—from perfect com-
petition to monopoly—
make key decisions about
output and prices. Then, in
Section 12, we will com-
plete our exploration of
market structure with a
closer look at oligopoly and
monopolistic competition.section
Market Structures:
Perfect Competition
and Monopoly
11
583
Competition Module 67Introduction to Monopolistic
Module 59:Graphing Perfect Competition
Module 60:Long-Run Outcomes in Perfect
Competition
Module 61:Introduction to Monopoly
Module 62:Monopoly and Public Policy
Module 63:Price Discrimination
Economics by Example:
“Is Adam Smith Rolling Over in His Grave?”
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