The preceding chapters have explored extreme forms of supply. The monopolist is the sole supplier and possesses as much market power as possible. In contrast the perfect competitor is insignificant in the marketplace and has no market power whatsoever. He simply accepts the price for his product that is determined in the market by the forces of supply and demand. These are very useful paradigms to explore, but the real world for the most part lies between these extremes. We observe that there are a handful of dominant brewers in Canada who supply more than three quarters of the market, and they are accompanied by numerous micro brewers that form the fringe of the brewing business. Likewise we have a small number of air carriers and one of them controls half of the national market.
In this chapter we will explore the relationship between firm behaviour and the size of the firm relative to the whole sector.
Rather than defining imperfect competitors in terms of the number of firms in the sector, or the share of total sales going to a small number of suppliers, we can differentiate imperfect competition from perfect competition by the characteristics of the demand curves they all face. We know that a perfect competitor faces a perfectly elastic demand at the existing market price; this is the only market structure to have this characteristic. In all other market structures suppliers effectively face a downward-sloping demand. This means that they have some influence on the price of the good, and also that if they change the price they charge, they can expect demand to reflect this in a predictable manner. So we will lump all other market structures, including the extreme of monopoly, under the title of imperfect competition, and firms in such markets face downward sloping demands.
Imperfectly competitive firms face a
downward-sloping demand curve, and their output price reflects the quantity sold.
The demand curve for the firm and industry coincide for the monopolist, but not for other imperfectly competitive firms. It is convenient to categorize the producing sectors of the economy as either having a relatively small number of participants, or having a large number. The former market structures are called oligopolistic, and the latter are called monopolistically competitive. The word oligopoly comes from the Greek word oligos meaning few, and polein meaning to sell.
Oligopoly defines an industry with a small number
of suppliers.
Monopolistic competition defines a market with
many sellers of products that have similar characteristics. Monopolistically competitive firms can exert only a small influence on the whole market.
The home appliance industry is an oligopoly. The prices of KitchenAid appliances depend not only on its own output and sales, but also on the prices of Whirlpool, Maytag and Bosch. If a firm has just two main producers it is called a duopoly. Canadian National and Canadian Pacific are the only two major rail freight carriers in Canada. In contrast, the local Italian restaurant is a monopolistic competitor. Its output is a package of distinctive menu choices, personal service, and convenience for local customers. It can charge a slightly higher price than the out-of-neighbourhood restaurant. But if its prices are too high local shoppers will travel elsewhere. Many markets are defined by producers who supply similar but not identical products. Canada’s universities all provide degrees, but the institutions differ one from another in their programs, their balance of in-class and on-line courses, their student activities, whether they are science based or liberal arts based, whether they have cooperative programs or not, and so forth. While universities are not in the business of making profit, they certainly wish to attract students, and one way of doing this is to differentiate themselves from other institutions. The profit-oriented world of commerce likewise seeks to increase its market share by distinguishing its product line.
Duopoly defines a market or sector with just two
firms.
These distinctions are not completely airtight. For example, if a sole domestic producer is subject to international competition it cannot act in the way we described in the previous chapter – it has potential or actual competition. Bombardier may be Canada’s sole aircraft manufacturer, but it is not a monopolist, even in Canada. It could best be described as being part of an international oligopoly in mid-sized aircraft. Likewise, it is frequently difficult to delineate the boundary of a given market. For example, is Canada Post a monopoly in mail delivery, or an oligopolist in hard-copy communication? We can never fully remove these ambiguities.
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