[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

is called monopoly. Your local electrical company may have a monopoly in supplying
electricity in your area. In a court case in 1999, Microsoft was found to have a
near monopoly in the market for personal computer operating systems. Because
the profits of a monopolist would normally attract other businesses into the market,
the firm must take advantage of some barrier to entry to maintain its monopoly
position. In Chapter 12, we will discuss some of those barriers.
In the second structure, several firms supply the market, so there is some competition.
This is called oligopoly. The automobile industry is an example, with a relatively
small number of global producers. The defining characteristic of oligopoly is
that the small number of firms forces each to be concerned with how its rivals will
react to any action it takes. If General Motors offers low-interest-rate financing, for
instance, other companies may feel compelled to match the offer, a predictable
response that General Motors will have to take into account before acting. By contrast,
a monopolist has no rivals and considers only whether special offers help or
hurt itself. And a firm facing perfect competition never needs to resort to any
special offer—it can always sell as much as it wants at the market price.
The third market structure contains more firms than an oligopoly but not enough
for perfect competition. This is called monopolistic competition. An example is
the market for laptop computers. IBM, HP, Toshiba, Sony, Gateway, Dell, and others
produce their own brand of laptops. Each is slightly different from the others, similar
enough that there is considerable competition—so much that profits may be
driven down to zero—but different enough to make competition limited and prevent
the companies from being price takers. The degree of competition under monopolistic
competition is greater than that in oligopoly, because monopolistic competition
involves a sufficiently large number of firms that each firm can ignore the reactions
of any rival. If one company lowers its price, it may gain a large number of customers.
But the number of customers it takes away from any single rival is so small that
none of the rivals is motivated to retaliate.
Both oligopolies and monopolistic competition are in-between market structures,
allowing some but not perfect competition. They thus are referred to as imperfect
competition.
Wrap-Up
ALTERNATIVE MARKET STRUCTURES
Perfect competition: Many, many firms, each believing that nothing it does will have
any effect on the market price.
Monopoly: One firm.
Imperfect competition: Several firms, each aware that its sales depend on the price it
charges and possibly other actions it takes, such as advertising. There are two
special cases:
Oligopoly: Sufficiently few firms that each must be concerned with how its rivals
will respond to any action it undertakes.
IMPERFECT COMPETITION AND MARKET STRUCTURE ∂ 243