James

MARKET STRUCTURE
MONOPOLY AND PERFECT
COMPETITION
THE MARKET STRUCTURE SPECTRUM

Oligopoly: 3+ big firms in an industry, dominating production. E.g.

Tesco, ASDA, Sainsbury’s, Morrisons (“The Big Four”).

Duopoly: 2 big firms in an industry, dominating production. E.g.

Pepsi and Coca Cola.

PERFECT COMPETITION
Four Characteristics
An increase in the supply by ONE firm would result
(1) All firms are producing a
in a small rightward movement along the demand homogenous product.
curve, and therefore demand will not change.
(2) There are many buyers
If output was doubled, the price would fall. If one and sellers (contribute little
perfectly competitive firm raises their prices, then to the final output of an
there are many other substitutes available to industry).
consumers. Likewise, it would be pointless to sell for
below the market price – they would lose potential (3) Buyers and sellers have
profit. the same information &
knowledge of the market.
The demand curve is horizontal – perfectly elastic.
(4) Few/no barriers to

THE GROWTH OF FIRMS

Why do firms want to
grow?
• Greater Market Share. They
can buy more products with
less competition.
• Economies of Scale. This
ensures a firm can reduce its
average costs and maximize
profits.
A concentration ratio is a method of measuring
the potential power of the largest and most
important companies in a particular market.
They look at a firm’s market share in the
industry, and how many workers are employed.
A three-firm concentration ratio would be the
total share of the market (output, employment
etc).

• Stifle Competition. Allows a

firm to reach a greater
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MERGER TAKEOVER

When two companies competing in When a firm takes over another firm in
HORIZONTAL

the same market join together. the same industry.

E.g. Ford and Volvo. E.g. Fullers takeover Gales.

When two firms, each working at When one firm takeover another firm,
VERTICAL

different stages in the production of operating in another stage of the

the same good, combine. production process.

E.g. Time Warner and Turner E.g. Wolverhampton & Dudley brewery
Corporation. takes over Pitcher & Piano brewery.

When a firm merges with a When a firm buys out a different firm in
CONGLOMERATE

different firm in another industry. another industry.

E.g. Virgin merging with NTL, to E.g. Orange taking over Wanadoo (ISP).
become Virgin Media.

FOR EXTERNAL GROWTH AGAINST EXTERNAL GROWTH

• Growth in both size and economic • Lack of expertise in a new field.

power.
• Risk of becoming too big 
• Easier to infiltrate foreign countries. Diseconomies of scale (e.g.
McDonalds).
• Easier to diversify.
• Safety risks (e.g. BP & and the oil
• Achieve faster economies of scale. accident).

• Greater control over the productive • Only an option for large firms 
process. lack of funds for small companies.

• Fend off a takeover. • Only ¼ of mergers/takeovers

MONOPOLY Sources of Monopoly
Pure Monopoly: A company who is the sole Power
supplier of a particular good/service. E.g. Letter
deliveries. 1. Availability of
substitutes/ potential
Monopoly Power: Spectrum of power – exists competitors.
where several firms share the market power 2. Advertising and
(legally, 25%). E.g. Eurotunnel, SWT, Tesco. Product
Differentiation/Brandi
Local Monopoly: Firms with monopoly power on a ng.
local scale. E.g. Village shop/pub. 3. Barriers to entry:

Natural Monopoly: When extensive economies of Innocent: Exist naturally

scale already exist. E.g. SWT – Rail network already exists.

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