Competition and Market Structures
FoundationMarket structures are classified by the number of sellers and buyers, the nature of the product, ease of entry, the degree of information, and whether firms are price takers or price searchers. Perfect competition, monopolistic competition, oligopoly and monopoly are theoretical constructs; real markets only approximate them, and the sources of monopoly power differ.
- Market structures are classified by seller and buyer numbers, product nature, ease of entry, information, and price taker versus searcher
- Perfect competition: many sellers, homogeneous product, free entry — each firm a price taker
- Monopolistic competition: many sellers, differentiated products, easy entry — common in catering and retail
文體小知識：經濟現象說明文——以賣家數目、產品性質等特徵比較四類市場結構，並以香港常見行業辨識其所屬結構。
§Text Passage
1A market is the arrangement through which buyers and sellers of the same good or service transact — a physical market, or an online platform. Economics classifies markets by six general features: the number of sellers, the number of buyers, the nature of the product, the ease of entering the market, the degree of information held, and whether firms are price takers or price searchers. A price taker must accept the market price; a price searcher has some control over price.
2Perfect competition is the first structure: many sellers and buyers, a homogeneous product, completely free entry, full information, and individual firms as price takers — above the market price nobody buys. Stock and foreign-exchange markets are common approximations. Monopolistic competition has many sellers, differentiated products and easy entry: tea restaurants and barbershops each build a character through taste, location and service, giving slight price control.
3In oligopoly there are few sellers, each holding a considerable share, and actions are interdependent: one cuts price, the others follow shortly; entry is hard and requires huge funds. Monopoly approaches a single seller with few substitutes and the greatest pricing power. Real markets rarely fit any class exactly — the four structures are theoretical constructs, and analysis proceeds by approximation.
4The sources of monopoly power are various: patents and copyrights granted by law, government licensing restrictions, control of key raw materials, economies of scale that keep a large firm's costs far below any entrant's, brand reputation, and integration. In Hong Kong, catering and retail are largely monopolistic competition, while supermarkets and banks approximate oligopoly — every feature must be checked one by one.
1Summary 重點摘要
Market structures are classified by the number of sellers and buyers, the nature of the product, ease of entry, the degree of information, and whether firms are price takers or price searchers. Perfect competition, monopolistic competition, oligopoly and monopoly are theoretical constructs; real markets only approximate them, and the sources of monopoly power differ.
2Vocabulary cards Vocabulary
The organisation of a market, classified by the number of sellers and buyers, product nature, ease of entry and other features.
A structure with many sellers and buyers, a homogeneous product, free entry and full information; individual firms are price takers.
A structure with many sellers, differentiated products and easy entry; firms have slight control over price.
A structure with few sellers, each holding a considerable share, interdependent actions and difficult entry.
A structure with a single (or near-single) seller, few substitutes and extreme barriers to entry; the firm has the greatest pricing power.
A seller who must accept the market price: any rise above it loses all customers.
A seller with some control over price, who sets it directly — the higher the price, the lower the sales.
How easily new firms can enter a market; barriers include huge capital, licensing restrictions and brand walls.
A government-granted right to produce and sell an invention exclusively for a fixed period — a common source of monopoly power.
3Step by step Steps
- Step 1: What a market is and how it is classifiedA market is the arrangement through which buyers and sellers of the same good or service transact; it need not be a physical place — an online platform is equally a market. Economics classifies markets by six general features: the number of sellers, the number of buyers, the nature of the product, the ease of entering the market, the degree of information held, and whether an individual firm is a price taker or a price searcher. For example, the Flower Market Road in Mong Kok is a flower market, while a food-delivery app hosts another market — the two differ sharply in seller numbers and information flow.
- Step 2: Price takers and price searchersA price taker is a seller who can only accept the market price — a slight raise above it loses every customer. A price searcher has some control over price and sets it directly, selling less as the price rises. Whether a firm can set price depends on how homogeneous the product is, how many sellers there are, and the barriers to entry. For example, one blue-chip share is the same share whoever the broker is, so the broker trades at the market price — a price taker; branded sports shoes can be priced by the maker — a price searcher.
- Step 3: Perfect competitionPerfect competition features many sellers and buyers, a homogeneous product, completely free entry and full information, with each firm a price taker. It is a theoretical construct; reality only approximates it. For example, stock and foreign-exchange markets come close: a given share or currency is identical everywhere, buyers and sellers are numerous, price information is highly transparent, and no individual participant's orders can move the market — all trade at the market price.
- Step 4: Monopolistic competitionMonopolistic competition features many sellers, differentiated products and easy entry, with information fairly well circulated. Differentiation may lie in quality, style, location or service, giving each firm slight control over price — a price searcher, though with limited power. For example, Hong Kong's tea restaurants, barbershops and pharmacies line the streets, each building its own character in taste, location and service to keep regulars; yet new rivals can open at any time, so competitive pressure never fades.
- Step 5: OligopolyOligopoly features few sellers, each holding a considerable market share, with interdependent actions — one cuts price and the others follow shortly; entry is difficult, requiring huge capital and operating networks; information held varies. For example, Hong Kong's chain supermarkets are dominated by a few groups, as are the major banks and mobile operators; for a newcomer to build the same network of shops and supply chains is extremely hard, so the number of sellers stays small for long periods.
- Step 6: MonopolyMonopoly means a market with virtually one seller, few or no substitutes and extreme difficulty of entry; the firm is the price searcher with the greatest pricing power. Common sources of monopoly power include patents and copyrights granted by law, government licensing restrictions, control of key raw materials, economies of scale that keep a large firm's costs far below any entrant's, and brand reputation or integration. For example, a pharmaceutical firm holding a patent produces the new drug exclusively during the patent term, and its pricing room far exceeds an ordinary firm's.
- Step 7: Theory versus realityThe four structures are theoretical constructs; real markets only approximate one of them, and judgement requires checking the features one by one, noting both matches and mismatches. The number of buyers is usually large in all four structures, so the decisive comparison lies on the sellers' side. For example, some call the supermarket trade an oligopoly, yet convenience stores and wet markets also sell some of the same goods, and the existence of substitutes dilutes monopoly power. The same market can invite different conclusions from different angles — the answer must state the reasons.
5Worked example Example
Application: in a city's ride-hailing market, only three companies operate, together holding over 90 percent of the market. Their services are similar and their fare structures almost identical — when one adjusts fares, the other two usually follow within a short time. A new entrant would need huge subsidies and system costs and finds entry hard. Identify the market structure, explaining by the number of sellers, the nature of the product, ease of entry, the degree of information, and price taker versus price searcher.
- Count the sellers: only three firms, each with a sizable share — the number of sellers is few
- Inspect the product: similar services with nearly identical fare structures — the product is close to homogeneous
- Assess entry: huge subsidies and system costs are barriers — ease of entry is low
- Note the interaction: one firm changes fares and the others follow — firms are interdependent and watch one another
- Conclude: the market is an oligopoly; each firm has price control and is a price searcher, not a price taker
- Answer: The market is an oligopoly: the sellers are few and each holds a considerable share; the product is close to homogeneous; entrants face huge upfront investment, so ease of entry is low; consumers can compare fares easily, so information is fairly complete; and the three firms are interdependent in pricing, one moving and the others following — all are price searchers. It differs from monopolistic competition (many sellers, easy entry) and from monopoly (virtually a single seller); prices converging under oligopoly matches the synchronised fare moves described.
6Common mistakes Mistakes
7Quick check Quick check
Q1Why is each firm under perfect competition a price taker?
Q2How do monopolistic competition and oligopoly differ in the number of sellers and ease of entry?
Q3How does a patent right create monopoly power?
Q4An industry has five similar-sized firms; two merge. What happens to the market structure?
Q5Why are the four market structures only theoretical constructs?
8Recap Recap
- Market structures are classified by seller and buyer numbers, product nature, ease of entry, information, and price taker versus searcher
- Perfect competition: many sellers, homogeneous product, free entry — each firm a price taker
- Monopolistic competition: many sellers, differentiated products, easy entry — common in catering and retail
- Oligopoly has few interdependent sellers; monopoly has virtually one seller with the greatest pricing power
- Patents, licensing, control of materials, economies of scale and integration are sources of monopoly power