Industrial Organization: Core Concepts

Market Structures: Who Are You Competing Against?

The type of market you’re in dictates how you compete.

1. Perfect Competition (The Ideal)

• Who: Many small firms.
• Product: All identical (e.g., wheat, corn).
• Entry: Very easy for new firms.
• Your Power: You are a price-taker. No control over price.
• Takeaway: Focus on efficiency to survive.

2. Monopoly (The Lone Wolf)

• Who: One dominant firm.
• Product: Unique, no close substitutes (e.g., some utilities).
• Entry: Very hard for new firms.
• Your Power: You are a price-maker. Set prices high.
• Takeaway: Often subject to government regulation.

3. Oligopoly (The Big Few)

• Who: A few large firms.
• Product: Can be similar or differentiated (e.g., airlines, cars).
• Entry: Hard for new firms.
• Your Power: Decisions are interdependent. What you do impacts rivals, and vice-versa.
• Takeaway: Strategic pricing (Game Theory) is critical. Watch competitors closely.

4. Monopolistic Competition (The Differentiators)

• Who: Many firms.
• Product: Differentiated (e.g., restaurants, clothing stores).
• Entry: Relatively easy.
• Your Power: Some control over price due to your unique offering.
• Takeaway: Focus on branding, marketing, and innovation to stand out.

Golden Rule: Knowing your market structure helps you understand your pricing power, your competitive environment, and the best way to develop your strategy.