Market Structures and Market Failures

trust

a combination of firms; in the late 1800s, trusts worked to eliminate competition and control prices, but were later banned under antitrust laws

public franchise

a contract issued by a government entity that gives a firm the sole right to provide a good or service in a certain area, such as a national park

negative externality

a cost of production or consumption that falls on someone other than the producer or consumer; a negative side effect

externality

a cost or benefit that arises from production or consumption of a good or service that falls on someone other than the producer or consumer; a spillover or side effect of production or consumption

market share

a firm's proportion of total sales in a market

free-rider problem

a free rider is someone who enjoys the benefit of a good or service, such as roads or public schools, without paying for it; free riding becomes a problem when it leads to underproduction of that good or service

license

a legal permit to operate a business or enter a market

natural monopoly

a market controlled by a single firm for reasons of efficiency; in a natural monopoly, one firm can provide a good or service at a lower cost than two or more competing firms

oligopoly

a market structure in which a few firms dominate the market and produce similar or identical goods

monopoly

a market structure in which a single producer supplies a unique product that has no close substitutes

perfect competition

a market structure in which many producers supply an identical product and no single producer can influence its price; in such a market, prices are set by supply and demand

monopolistic competition

a market structure in which many producers supply similar but varied products

price setter

a producer that can set a price for a product, rather than accepting the market price

price taker

a producer that has no influence over the price of a product; price takers must accept the market price

commodity

a product that is exactly the same no matter who produces it

market failure

a situation in which the market fails to allocate resources efficiently

brand

a trade name

antitrust law

legislation designed to limit the formation of monopolies or combinations of firms that act to restrict competition

market power

the ability of producers to influence prices

price leadership

the ability of the dominant firm in an oligopoly to set price levels that other firms then follow

product differentiation

the attempt by firms to distinguish their goods and services from those of other firms

economies of scale

the greater efficiency and cost savings that result from large-scale or mass production

start-up costs

the initial expense of launching a business

market structure

the organization of a market, based mainly on the degree of competition; there are four basic market structures: perfect competition, monopolistic competition, oligopoly, and monopoly

concentration ratio

the proportion of a market controlled by a fixed number of companies; for example, a four-firm concentration ratio shows how much of a market is controlled by the four largest firms in that market

brand loyalty

the tendency to favor one company over all others in a market

transaction costs

the time and money consumers spend shopping for the best product at the best price

nonprice competition

the use of product differentiation and advertising to attract customers

excludable

a characteristic of a good or service whose use can be denied to those who do not pay for it; a feature of private goods

nonexcludable

a characteristic of a good or service whose use cannot be denied to anyone; a feature of public goods

positive externality

a benefit of production or consumption that falls on someone other than the producer or consumer; a positive side effect

technology spillover

a benefit that results when technical knowledge spreads from one company or individual to another, thereby promoting new innovations

nonrival in consumption

a characteristic of a good or service that can be used or consumed by more than one person at the same time; a feature of public goods

rival in consumption

a characteristic of a good or service that cannot be used or consumed by more than one person at the same time; a feature of private goods

private goods

goods and services that are sold in markets; distinct from public goods

collusion

an arrangement in which producers cooperate on production levels and pricing; collusion is illegal in the United States

price war

an intense competition among rival firms in an oligopoly in which they successively lower prices to increase sales and win a larger share of the market

barriers to entry

an obstacle that can restrict a producer's access to a market and limit competition

cartel

an organization of producers established to set production levels and prices for a product; cartels are illegal in the United States but do operate in global markets

imperfect competition

any market structure in which producers have some control over the price of their products; in such a market, prices are no longer set by supply and demand

public goods

goods and services that are used collectively and that no one can be excluded from using; public goods are not provided by markets