This is just one of the stories from our “I’ve Always Wondered” series, where we tackle all of your questions about the world of business, no matter how big or small. Ever wondered if recycling is worth it? Or how store brands stack up against name brands? Check out more from the series here.
Laurent Pelletier from San Diego, California, asks:
I teach Advanced Placement courses in microeconomics and a reoccurring problem is an inability to find real world examples of the four market structures — perfect competition, monopolistic competition, oligopolies, and monopolies — that aren’t geographic or natural. What are some current examples of these market structures?
The prices that companies charge for your groceries, electronics and airfare will depend on factors like supply and demand, how much competition there is and how much market power these businesses have.
To make sense of the competitive landscape and understand your place in it as a consumer, you can look to the four major market structures: perfect competition, monopolistic competition, oligopolies and monopolies.
They give us a sense of how many companies and consumers are in an industry, how hard it is to break into that industry and whether companies have the ability to control prices.
Here’s a look at the main market structures and examples of each:
Perfect competition
Perfect competition occurs when there are many buyers and sellers in the market, the sellers offer identical products, sellers and buyers have the information they need “to make rational decisions” about these products, and companies can freely enter or exit the market. In a perfectly competitive market, companies have to accept the equilibrium price in the market, because if one company raises its prices, it’ll lose customers. The equilibrium price is the price at which the quantity demanded by consumers equals the amount that producers want to sell.
One example would be the market for corn. “There are tens of thousands of people growing corn, and corn is corn, pretty much. So they don’t have the power to raise prices because people will just buy from another farmer essentially,” said William Boal, an economics professor at Drake University.
Or take agave, a key ingredient in tequila. In 2018, there was a tequila boom, which encouraged large numbers of people in Mexico to plant the crop, according to the Financial Times. In 2014, the number of registered agave growers stood at 3,180. In 2023, that number reached 41,000. That would be an example of perfect competition, said Valerie Suslow, an economics professor at Johns Hopkins University.
Monopolistic competition
When it comes to monopolistic competition, there are many companies offering products that are similar to one another, but not identical, and the barrier to entry is low. Raising prices also won’t alienate customers to the extent that it would in a perfectly competitive market. “Each individual firm is not a monopoly by any means, but they have just a little bit of market power through product differentiation,” Suslow said.
One example of monopolistic competition would be “ethnic restaurants,” Boal said. (Or restaurants that offer food with origins outside of the U.S., like Greek, Chinese and Mexican restaurants).
“It’s not too hard to open a restaurant, but the different cuisines mean that people don’t just look at the price, they care about what cuisine it is,” Boal said. “If your cuisine is a little bit unique, you can raise the price without losing all your customers. It might not be a good idea to do, because you lose profits. But the point is you don’t lose all your customers.”
While it’s difficult to make money in the restaurant industry because there are so many other restaurants, you can differentiate yourself from your competitors by offering cuisine from another region, Boal said. So, for example, a Greek restaurant will be able to stand out among other non-Greek restaurants.
Monopolies
A monopoly occurs when there’s a single or dominant seller offering a particular good or service, giving them the power to set prices, and there are large barriers to entry.
There are natural monopolies, which occur when economies of scale are large relative to demand, meaning one seller can serve the market “more efficiently” than multiple sellers. A non-natural monopoly might arise when there are legal barriers to entry.
Take Yosemite Hospitality, LLC for example. The National Park Service granted the company an exclusive contract for all concessions in Yosemite Valley for 15 years, said Stephen Conroy, an economics professor at the University of San Diego. Yosemite Hospitality provides services like lodging, dining and transportation.
Or think of pharmaceutical companies, which have patents that allow companies to be the only seller of a drug.
But it’s hard to find examples of a pure monopoly, Boal said. Even if pharmaceutical companies have a patent, you might be able to find substitutes on the market.
“You often see several different drugs on the market that are a little bit different from each other, and have different side effects and whatnot that are aimed at the same illness,” Boal said.
AT&T was considered a monopoly at one point and had the ability to raise prices, but the government forced the company to break up.
Monopolies that are allowed to exist, like electric utilities, are regulated by the government, Suslow said.
Oligopolies
In an oligopoly, just a few sellers dominate the market, allowing them to charge higher prices than competitive markets. There are also high barriers to entry like in a monopoly.
The airline industry is an example of an oligopoly, Suslow said. Four carriers — American, Delta, Southwest and United — control 80% of the market.
The major cereal manufacturers can also constitute an oligopoly, Suslow added. Kellogg, General Mills, Post and Quaker dominate the market for the popular breakfast food.