Forms of Industrial Organization

Forms of Industrial Organization

Introduction

“In economics, market structure describes the state of a market with respect to competition” (Peterson, 2008). The major market forms are monopoly, oligopoly, monopolistic competition, and perfect competition. A monopoly exists where there is only one provider of a product or service. An oligopoly “denotes a situation where there are few sellers for a product or service. The members of an oligopoly change the nature of a free market” (Peterson, 2008). Monopolistic competition exists where there are a large number of companies which have a small share of the market share. Perfect competition occurs when the market consists of a large number of companies producing a homogeneous product.

Monopoly

A monopoly is an “economic situation in which only a single seller or producer supplies a commodity or a service. For a monopoly to be effective there must be no practical substitutes for the product or service sold, and no serious threat of the entry of a competitor into the market. This enables the seller to control the price” (Peterson, 2008). Since the enactment of the Sherman Anti-Trust Act in 1890 monopolies have become almost nonexistent. One example of a monopoly is easily cited, it held a monopoly until recent years and some may argue still does, De Beers.

“For most of the 20th century, De Beers sold 85% to 90% of the diamonds mined worldwide. With this leverage, it could artificially keep diamond prices stable by matching its supply to world demand. Rockefeller's Standard Oil and Gates' Microsoft may have briefly approached this kind of dominance, but the length and extent of De Beers' supremacy is unprecedented” (Stein, 2001). Because De Beers controls the supply, even going so far as purchasing competitors surplus, the company also controls the price of the world’s diamonds. “Analysts say De Beers is succumbing to the inevitable - that competition has been chipping away at its market control to the point that it isn't even a monopoly anymore. But old names die hard, and the U.S. government still bans the company from doing business there because it's deemed a monopoly” (Keaton, 2000).

Oligopoly

An oligopoly is a market form in which a market or industry is dominated by a small number of sellers or oligopolists. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of one firm influence and are influenced by the decisions of other firms.