AP Economics w/ Gabriel Swarts, 2014

1. Market
Structure
PERFECT COMPETITION, MONOPOLISTIC COMPETITION,
OLIGOPOLY, AND MONOPOLY
By Manet Ramsey Nelson
1Thursday, April 3, 14

2. Market Structure: Introduction
Market structure is the configuration of an industry.
The term actually refers to the number of firms producing
theoretically homogeneous products. But when that number
grows or shrinks, its effect on the market is so severe that
classification of the resulting structures is in order.
2Thursday, April 3, 14

3. the categories
Market structure is primarily made up of four categories, each with
distinctive characteristics. These categories are known as--in
order of the implied number of firms, from greatest to least--
perfect competition, monopolistic
competition, oligopoly and monopoly.
3Thursday, April 3, 14

4. Perfect Competition
Mansfield: it is
defined by requirement of
four conditions:
Krugman et al: “price equals
marginal cost at the price-taking
firm’s optimal quantity of output.”
Stigler: “[perfect competition] will
prevail when there are indefinitely
many traders . . . acting
independently in a perfect market.”
Perfect competition
requires that “the product
of any one seller be THE
SAME as the product of
any other seller.”
Also, every participant in
the market, “whether buyer
or seller,” must be a
PRICE-TAKER.
“Third, perfect competition
requires that ALL resources
be COMPLETELY MOBILE.”
“Fourth . . . consumers,
firms, and resource owners
[must] have PERFECT
KNOWLEDGE . . .”
i.e. -- (Within the market) all products must be homogeneous, all participants must be price-takers
who have perfect knowledge, and all resources must be able to easily and quickly switch owners.
4Thursday, April 3, 14

5. Sources (Perfect Competition)
Mansfield, Edwin. Microeconomics: Theory and Applications. 3rd ed.
London: Norton and Company, 1970. Print.
Pages cited: p. 249, 250, on the “Four Conditions” required of
perfectly competitive markets.
Ray, Margaret, David Anderson, Paul Krugman, and Robin Wells. Krugman’s
Economics for AP. New York: Worth Publishers, 2011. Print.
Page cited: p. 585, on “the price-taking firm’s optimal output
rule.”
Stigler, George J. "Perfect Competition: Historically Contemplated."
Microeconomics: Selected Readings. 3rd ed. Ed. Edwin Mansfield.
Portsmouth: Heinemann, 2000. 24-34.
Page cited: p. 184, on the definition of “perfect market
competition.”
School of Business Administration. The University of North Carolina at
Pembroke, n.d. Web. 29 March 2014.
Image cited: Graph of a firm in a perfectly competitive market,
taken from an exam.
5Thursday, April 3, 14

6. monopolistic
competition
Hart: “[monopolistic competition] may be defined as a situation where (1)
there are many firms producing differentiated commodities; (2) each firm
is negligible, in the sense that it can ignore its impact on, and hence
reactions from, other firms; (3) free entry leads to zero profit of
operating firms; but (4) each firm faces a downward-sloping demand curve
and hence equilibrium price exceeds marginal cost.”
Krugman et al.: “Because each firm is offering a distinct
product, it is in a way like a monopolist. . . . However,
unlike a pure monopolist, a monopolistically competitive
firm does face competition: the amount of its product it
can sell depends on the prices and products offered by
other firms in the industry.”
Mansfield: “The long-run equilibrium position is the point where (1) the long-run
average cost curve . . . is tangent to the dd’ demand curve, and where (2) the
DD’ demand curve intersects the DD’ demand curve and the [long-run average
cost curve] at the tangency point.”
According to Mansfield, “dd’ demand curves”
are those that “[show] how much the firm
will sell if it varies its price from the
going level and if other firms maintain
their existing prices,” while “DD’ demand
curves” are “based on the suppositiong that
all firms raise or lower their prices by the
same amount as this firm.”
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7. Sources (monopolistic Competition)
Hart, Oliver D. “Monopolistic Competition in the Spirit of Chamberlin: A General
Model.” Review of Economic Studies (1985): 529-546. Web. 29 March 2014.
Page cited: p. 529, on the Chamberlinian definition of monopolistic
competition
Ray, Margaret, David Anderson, Paul Krugman, and Robin Wells. Krugman’s
Economics for AP. New York: Worth Publishers, 2011. Print.
Page cited: p. 659, an introduction to monopolistic competition
Mansfield, Edwin. Microeconomics: Theory and Applications. 3rd ed. London:
Norton and Company, 1970. Print.
Pages cited: p. 316-320, under the headings “Demand Curves under
Monopolistic Competition” and “Equilibrium Price and Output in the Long
Run” and p. 329 on opposition to the theory of monopolistic competition
(cited extensively in discussion)
The photographs of Joan Robinson and Edward Chamberlin used on slide 10 (under
the “History” heading in discussion) both can only be cited as n.a. (no artist
or photographer), n.t. (no title of artwork), photography, n.d. These are the
URLs from which the images used here were downloaded.
Joan Robinson’s image. Web. 30 March 2014. <http://econwikis-
mborg.wikispaces.com/Joan+Robinson>
Edward Chamberlin’s image. Web. 30 March 2014. <http://
www.wisdomsupreme.com/dictionary/edward-chamberlin.php>
7Thursday, April 3, 14

8. Oligopoly
Robert Dorfman
An oligopoly is a market in which there are a few
firms, each of which recognizes that its actions
have a significant impact on the price and supply
of the commodity.
krugman et al.
firms are interdependent when the outcome
(profit) of each firm depends on the actions of
the [small number of] other firms in the market.
shubik
[poker games and “the situation of two
firms in an advertising campaign”] obviously
have a common core.
Shubik
Martin Shubik refers
to game theory, which
price-making
oligopolists must
utilize.
8Thursday, April 3, 14

9. Sources (Oligopoly)
Ray, Margaret, David Anderson, Paul Krugman, and Robin
Wells. Krugman’s Economics for AP. 3rd ed. New York:
Worth Publishers, 2011. Print.
Page cited: p. 638, on interdependence in
oligopolistic markets.
Shubik, Martin. “The Uses of Game Theory in Management
Science.” Microeconomics: Selected Readings. 3rd ed. Ed.
Edwin Mansfield. Portsmouth: Heinemann, 2000. 24-34.
Page cited: p. 291, on the elements of game theory.
Dorfman, Robert. Prices and Markets. 2nd ed. Englewood
Cliffs: Prentice-Hall, 1972. Print.
Image cited: Graph of a firm in a perfectly
competitive market, taken from an exam.
9Thursday, April 3, 14

10. monopoly
Dorfman: A monopoly is a market in
which all or virtually all of the
commodity is produced by a single
seller.
Mansfield: . . . a firm may become
a monopolist because the
average cost of producing the
product reaches a minimum at
an output rate that is big enough to satisfy the entire
market at a price that is profitable. . . . Cases [like these]
are called natural monopolies.
While monopolies are usually considered generally bad for an economy,
mostly because of the deadweight loss created by loss of consumer
surplus and, if the demand product is very inelastic, the potential for
abuse of monopolist’s unlimited price-making power abounds—what if the
monopoly is efficient in the sense that
any other business’s entry would only
create a market surplus? Laws about
“natural monopolies” are
controversial this way.
Krugman et al.: [A monopoly’s] demand curve is simply the
market demand curve, which slopes downward . . . This
downward slope creates a “wedge” between the
price of the good and the
marginal revenue of the good.
Krugman talks here about the
deadweight loss (on graphs, the wedge)
in monopolistic markets, which
actually disappears money or at least
its value (see Module 9 of Krugman’s
book, which first introduces its readers to the concept of deadweight
loss). But unlike the quota-rent opportunity cost example that module
describes, the wedge created in monopolistic markets involves loss of
consumer surplus.
10Thursday, April 3, 14

11. Sources (monopoly)
Ray, Margaret, David Anderson, Paul Krugman, and Robin
Wells. Krugman’s Economics for AP. 3rd ed. New York:
Worth Publishers, 2011. Print.
Pages cited: p. 608-609, on wedges and demand curves
in monopolistic markets.
Mansfield, Edwin. Microeconomics: Theory and
Applications. 3rd ed. London: Norton and Company, 1970.
Print.
Page cited: p. 281, on the cases of natural
monopolies.
Dorfman, Robert. Prices and Markets. 2nd ed. Englewood
Cliffs: Prentice-Hall, 1972. Print.
Page cited: p. 145, on the definition of monopoly
11Thursday, April 3, 14

12. The metric system: An overview
These example industries are judged against the criteria for their
market structure with Mark-Struc-A-Meters. The meters used to judge
perfect competition and monopoly are more more lenient because those
market structures are much rarer in real life.
The Mark-Struc-A-Meters are as follows:
Perf-Comp-A-Meter
Passing grade: 50% (“perfectly competitive within the
boundaries of this universe”)
Mono-Comp-A-Meter
Passing grade: 75% (“sounds like monopolistic competition to
students who don’t read their textbooks”)
Olig-A-Meter
Passing grade: 75% (“sounds like oligopoly to people who read
the New York Times but not their textbooks”)
Mono-A-Meter
Passing grade: 50% (“monopolistic within the boundaries of
this universe”)
12Thursday, April 3, 14

13. Example of Perfect Competition:
The happy, flappy, tappy Market
This booming market is famous for the
overwhelming youth of its developers,
consumers, and the industry itself.
The favored marketplace is the iTunes
App Store, where new developers can
enter the market with only a few
clicks, but the software is bought
and sold across the entire internet.
Note: Yes, this is the specific market for Flappy
Bird copycat games, which sells products that are
almost perfectly homogeneous.
13Thursday, April 3, 14

14. and how is
The happy flappy tappy Market
perfectly competitive?
Is there an indefinite number of traders?
Acting independently?
In a perfect market?
Does it satisfy Mansfield’s four conditions?
Are the products sold within it homogeneous?
If not perfect, are they at least close substitutes?
Are all participants in the market price-takers?
Are all resources completely mobile?
Do all participants have perfect knowledge?
Have all firms in the market decided upon the same price for their
similar commodities, adjusted only for production costs?
14Thursday, April 3, 14

15. Is there an indefinite number of
traders?
Acting independently?
In a perfect market?
Does it satisfy Mansfield’s four
conditions?
Are the products sold within it
homogeneous?
If not perfect, are they at
least close substitutes?
Are all participants in the market
price-takers?
Are all resources completely
mobile?
Do all participants have perfect
knowledge?
Have all firms in the market decided
upon the same price for their similar
commodities, adjusted only for
production costs? What are those
prices?
The amount of traders in this industry
is astronomical.
Yes, they seem to be.
No, none have perfect knowledge.
To an extent.
No, there is some variation among the
software sold.
Yes, the Flappy Bird copycat
games run on the same game
mechanisms as the original’s.
Yes.
Yes (completely!), because every
transaction is digital and
programmers may work from home.
No, but only due to the incredible
variety of options.
Yes--firms sell products at seemingly
preset prices. The amount of coding
involved is the only production cost in
a purely digital market. Games
developers offer simple Flappy Bird
copies for free, but charge 0.99 for
something slightly more complex
(“Customize Flappy Textbook with over 80
different skins!”) and 3.99 for a much
more complicated game (“Flappy Textbook
Lost in Space”).
2
/
3
2.
5
/
4
1
15Thursday, April 3, 14

16. Conclusion:
The happy flappy tappy Market
is 68.75% perfectly competitive.
It scored 5.5 points out of 8 on the Perf-Comp-A-
Meter. This is actually pretty good, considering
how unrealistic the theory of perfect competition
actually is! This industry is now declared
perfectly competitive within the boundaries of
this universe. Admittedly, it may be
monopolistically competitive in a more technical
sense, because the products within it are
actually differentiated; however, Flappy Bird
“remixes” are much closer substitutes than
products within textbook monopolistically-
competitive markets, so this real-life market is
closer to theoretical perfect competition than it
is to imperfect competition.
16Thursday, April 3, 14

17. Inside the online games market:
isTom Games is a Hungarian developer
and publisher of game applications for
iOS/iPhone. Their games include Tappy
Nyan, a member of the perfectly
competitive sub-market for Flappy Bird
copycats. It is available as freeware,
due to the market-wide equilibrium
price for this good; a perfectly
inelastic demand curve prevents isTom
Games from charging anything above $0
USD for the Tappy Nyan app.
17Thursday, April 3, 14

18. Example of monopolistic Competition:
The western comics market
Note: “The Western market” refers to comics whose art does
not fit within Japanese anime/manga styles, regardless of
the actual nationality of its creators. It is usually
classified as a separate market, because most comics
readers prefer one style.
The internet has recently transformed this industry into
one with much easier entry; with a lot of time, a scanner
and a domain name, practically anyone can begin a webcomic
today, and successful webcomics can switch to print with a
guaranteed fanbase. Before this century, the long-
established giants D.C. and Marvel practically owned the
entire industry as an oligopoly; in stark contrast, the
2013 market revenue shares of D.C. Comics and Marvel
comics were 30.33% and 33.50% respectively. (Source:
BleedingCool.com, “Marvel Takes 2013 Market Share Prize —
But Not By Much.”) Their new competition, obviously, was
composed of hundreds of young artists working individually
or in tiny firms to share their graphic stories.
18Thursday, April 3, 14

19. and how is
The western comics Market
monopolistically competitive?
Does it fit Hart’s four situational conditions?
Are there many firms producing differentiated commodities?
Is each firm a negligible price-taker?
Does free entry lead to zero profit of operating firms?
Does each firm face a downward-sloping demand curve?
So that equilibrium price exceeds marginal cost?
Does the amount of its product a firm can sell depend on the prices
and products offered by other firms in the industry?
Does the demand curve for a single firm’s products differ from the
demand curve for the entire market?
19Thursday, April 3, 14

20. Does it fit Hart’s four situational conditions?
Are there many, many firms in the market?
Each producing differentiated,
possible trademarked commodities?
Is each firm a negligible price-taker?
Does free entry lead to zero profit of
operating firms?
Does each firm face a downward-sloping
demand curve?
So that equilibrium price exceeds
marginal cost?
Does the amount of its product a firm can sell
depend on the prices and products offered by
other firms in the industry?
Does the demand curve for a single firm’s
products differ from the demand curve for the
entire market?
3/4
Yes, the Internet makes entry into
the market incredibly simple.
Yes, the creative process
should be unique to each comic.
NO. The industry’s giants can
charge much higher prices.
Yes.
Yes, even webcomics (who make profit
off of hosted advertising, which
readers hate nearly as much as
spending money).
Yes, for firms making profit.
Yes. For example, comics new to print
appearing in stores will not sell if not
for less than Marvel’s well-established
stories.
Yes, because consumers prefer certain
comics and art styles over others.
3
/
4
2
/
2
20Thursday, April 3, 14

21. Conclusion:
The Western Comics Market
is 83.33% monopolistically competitive.
It scored 5 points out of 6 on the
Mono-Comp-A-Meter, giving it a grade
considerably above the meter’s
passing grade of 75%. Hence, this
industry is now declared officially
the kind that sounds like
monopolistic competition to students
who don’t read their textbooks,
which is (im)perfectly (competitive
and) okay.
21Thursday, April 3, 14

22. Inside the online games market:
Wayward Sons: Legends is a full-page sci-fi comic appearing
both online (at www.waywardsons.keenspot.com) and in print.
The comic follows the crew of the Ulympea, intergalatic
jailguards who had been escorting the Tytan—a prison ship
supposed to banish millions of criminals to another dimension
—when the ship’s Star Core malfunctions, wrecking both ships
on Planet Earth and mutating their populations. The
Ulympeans and Tytans soon find out that in addition to new
powers, they are all now nearly immortal, allowing for the
struggle between their groups to inspire every myth and
legend in human history.
The comic is scripted and lettered by Benny R. Powell (aka
wizbenny) and its art is created by Twinkle Planet Studios, a
trio consisting of Weilin Yang, Youjun Yang, and Kun Song
(who pencil, ink and color respectively).
The positive critical responses to Wayward Sons often mention
its well-written female characters, calm portrayal of LGBT
relationships (ex. Andorra and Cassie), emotional
seriousness, and historical accuracy. All of these are
politically progressive traits found almost never in comics
by D.C. Comics and still rarely in those from Marvel Comics.
22Thursday, April 3, 14

23. Example of oligopoly:
The health insurance market
A 2009 article titled “The Health Insurance Oligopoly” by Julie Robinsky on CNBC.com
speculated on then-emerging healthcare oligopolies, but never mentioned Obama’s
health insurance plan for the country as she wrote only during his first year in
office.
But in “America’s Coming Health Care Oligopoly,” published on Forbes.com in 2010,
Merrill Matthews blamed the nasty trend (“A recent study by the American Medical
Association found that in nearly half the states, two health insurers covered 70% or
more of the population,” one quote reads) on Obamacare.
The controversy continues today. This past Monday, Slate online magazine published
an article arguing FOR oligopoly as a method with which to save Obamacare. The
authors, André Veiga and E. Glen Weyl, argue that “free competition can easily ruin
insurance markets,” supporting their statement with the thought experiment “If almost
all healthy people opt for bronze, as preliminary numbers suggest is likely, leaving
the older and sicker in platinum, the cost of platinum plans will become prohibitive
because the health care costs of the sick are so high. This would drive the platinum
plans out of the market, leaving only .bronze. [sic]” So why does that mean,
according to another direct quote, “we need an Obamacare oligopoly”?
It seems that Veiga and Weyl wanted more government control of this economy, while
the previously quoted Matthews hated it as much as he did oligopolies: he considered
most oligopolies to be the inefficient results of poor government investment choices.
Yes, there is an oligopoly in this market; the controversy is only about who’s
responsible for it.
23Thursday, April 3, 14

24. and how is
The health insurance Market
oligopolistic?
Are there only a few firms in the market?
Each of which is a price-maker?
And recognizes their impact on the price and supply of
the commodity?
Are the firms interdependent?
Does the profit of each firm depend on the actions of
their competitors?
Do these oligopolists use game theory to strategize?
24Thursday, April 3, 14

25. Are there only a few firms
in the market?
Each of which is a
price-maker?
And recognizes their
impact on the price
and supply of the
commodity?
Are the firms
interdependent?
Does the profit of each
firm depend on the
actions of their
competitors?
Do these oligopolists use
game theory to strategize?
Yes
Yes
Assumedly so
Yes
Yes, because all
firms in the market
produce substitute
goods.
It’s certainly
applicable, though
doubtful that they
utilize it.
3
/
3
2
/
2
1
25Thursday, April 3, 14

26. Conclusion:
The health insurance Market
is 100% Oligopolist.
It scored 6 points out of 6 on
the Olig-A-Meter, which means
it’s very much oligopolist,
except it could still be
declared officially “sounds
like oligopoly to people who
read the New York Times but not
their textbooks.”
26Thursday, April 3, 14

27. Inside the Healthcare insurance market:
BlueCross gained a media frenzy in 2009 when the Washington Post exposed its cases
of devastating “rescission,” along with those of many other healthcare providers.
According to the article by Karl Vick (“As ‘Rescissions’ Spawn Outrage, Health
Insurers Cite Fraud Control) Blue Cross abruptly cancelled the coverage for a Los
Angeles woman after she was diagnosed with a thyroid disorder, fluid in the heart,
and lupus, leaving her with $25,000 in medical bills. Blue Cross had also
stigmatized the woman for commitment of fraud on a health questionnaire for not
listing those conditions (which she didn’t know she had at that time), which made
her also unable to find medical coverage elsewhere.
These unethical practices were carried out in 2006 and 2008, long before talk of
Obamacare—but nonetheless, they probably contributed a great deal to future votes
about the subject of healthcare.
Even with the semi-public healthcare complete with glitching websites that we’ve
recently received, many people today are still victim to rescission from insurance
companies like BlueCross.
27Thursday, April 3, 14

28. Example of monopoly:
The ykk zipper monopoly
The letters “YKK” stand for Yoshida Kōgyō Kabushiki
Kaisha, which translates to “Yoshida Manufacturing
Shareholding Company.” YKK produces multiple kinds
of fasteners and architectural products, but has
had the most success with zippers.
YKK’s success can possibly be attributed to its
early acquisition of the advanced machinery, which
significantly lowers their production costs. The
chain machine YKK first bought was actually from
the United States.
The YKK Group remained the world-wide market leader
for zipper manufacturing in 2013.
(www.CompaniesandMarkets.com, “Global zip fasteners
market recovers in 2013 with YKK remaining the
market leader.”)
28Thursday, April 3, 14

29. and how is
the zipper industry
monopolistic?
Is all of the commodity produced by a single seller?
Or virtually all of it?
Is the market’s demand curve downward-sloping (NOT perfectly
elastic)?
Does this slope create a “wedge”?
Between the price of the good and the marginal revenue
of the good?
29Thursday, April 3, 14

30. Is all of the commodity
produced by a single
seller?
Or virtually all of
it?
Is the market’s demand
curve downward-sloping
(NOT perfectly
elastic)?
Does this slope
create a “wedge”?
Between the
price of the
good and the
marginal revenue
of the good?
Not all of it
Virtually all, yes.
Yes; it is the market
demand curve.
Yes
Yes
1/
2
4/
5
30Thursday, April 3, 14

31. Conclusion:
The zipper industry
is 80% Monopolist.
It scored 4 points out of 5 on the
Mono-A-Meter, which is well above a
passing grade, so it’s now declared
monopolistic within the boundaries of
this universe. I originally wanted
to do this part of the project with
the Medici monopoly on alum mining,
but I felt a historical example would
be too much of a risk (regarding my
grade), because I wasn’t actually
sure if they were allowed.
31Thursday, April 3, 14

32. Market
Structure
but this topic is much, much broader, so check out some of
the books cited in the source pages.
and i’d say that’s all there is to
32Thursday, April 3, 14