ECO 365 Week 4 Market Structures Example

One Product, Four Market Structures: Egg Farms, a Neighborhood Bakery, a Few Large Egg Producers and the Local Water Utility Compared on Price, Output and Profit

[Student Name]

University of Phoenix

ECO/365: Principles of Microeconomics

Week 4 Assignment

[Instructor Name]

[Date]

The bakery, the farm and the utility are composites written for a model paper; market concepts, legal events and research findings come from the sources listed and are stated generally.

The egg market of 2025 put several kinds of businesses in the news at once: farms selling eggs at record prices, bakeries passing costs to customers, large producers accused by shoppers of profiteering and, in the background, local utilities whose bills nobody could shop around. Each operates in a different market structure. How a business sets its price depends less on how it feels about customers than on how many rivals it has and how easily new ones can enter. This paper compares the four structures using those businesses.

Perfect Competition: The Egg Farm

Prairie Hill Farms, the composite Iowa producer from Week 3, sells eggs that buyers see as nearly identical to anyone else's, into a national market with many producers. No single farm can affect the wholesale price, so each is a price taker: its marginal revenue equals the market price. It maximizes profit by producing where marginal cost equals price. In 2025, high prices let farms like Prairie Hill earn large short-run profits. In the long run, such profits attract expansion and new entry, raising supply until price falls back toward average total cost and economic profit approaches zero (Mankiw, 2021).

Why Eggs Are Not Perfectly Competitive in Every Way

The egg market departs from the model in some respects. Large producers account for a substantial share of output, entry requires large capital investments and contracts with grocery chains differentiate sellers somewhat. Still, the product is close to a commodity, and prices are set largely by market-wide supply and demand, so the competitive model explains much of what happened.

Monopolistic Competition: The Bakery

Maria Ortiz's composite Columbus bakery sells custard tarts, breads and cakes that differ from those of other bakeries in taste, location and service. Chamberlin (1933) described this structure: many firms, differentiated products and free entry. Maria has some pricing power; when she raised the tart price by 50 cents, she lost some customers but not all. Her demand curve slopes downward, so her marginal revenue is below price. In the long run, if bakeries in Columbus earned unusual profits, new ones would open, drawing away customers until profits fell to normal levels. Firms compete through product variety, quality and advertising as well as price.

Oligopoly: The Largest Egg Producers

A few large companies produce a sizable share of U.S. eggs. In an oligopoly, each firm's decisions affect its rivals, so firms consider one another's likely responses. That interdependence creates a temptation to coordinate, holding back output to keep prices high, as well as a temptation to cheat on any such arrangement by producing more. Coordinating output is illegal under antitrust law. In 2023, a federal jury in Chicago found that several egg producers and industry groups had conspired years earlier to reduce supply, awarding damages to food manufacturers that bought eggs. In 2025, as prices hit records, the Justice Department opened an investigation into egg pricing; investigations are not findings of wrongdoing.

Measuring Market Power

Lerner (1934) proposed measuring market power by how far price exceeds marginal cost relative to price. A perfectly competitive firm has a Lerner index of zero. During the 2025 spike, the gap between wholesale egg prices and producers' marginal costs was very large, but in a market where supply had been destroyed by disease, a high markup can reflect scarcity rather than market power. Separating the two is exactly what antitrust investigators must do.

Monopoly: The Water Utility

The Columbus water utility is the only supplier of tap water to the bakery and its neighbors. Building a second set of pipes would double costs, so one provider serves the market most cheaply, a natural monopoly. An unregulated monopolist would produce where marginal revenue equals marginal cost and charge a price above marginal cost, restricting output. Because water is essential, public ownership or regulation sets rates to cover costs and a reasonable return. Maria cannot shop for a cheaper water supplier, but she can attend rate hearings.

Barriers to Entry in Each Case

Barriers to entry separate the structures. Starting a bakery requires modest capital and skills, so entry is easy and profits are competed away. Starting a large egg farm requires tens of millions of dollars, contracts with buyers and expertise in disease control, so entry is slower, which is why profits from the 2025 spike lasted until flocks recovered rather than disappearing at once. The water utility is protected by the economics of pipes and by law. The height of these barriers explains why profits persist longer in some markets than others.

Game Theory in the Egg Market

Oligopolists face a version of the prisoners' dilemma. Each large producer would earn more if all restrained output to keep prices high, but each is tempted to expand when prices are high to capture more of the profit. Without enforceable agreements, which antitrust law forbids, expansion usually wins, and prices fall as flocks are rebuilt. That temptation helps explain why coordinated supply restraint, when it has occurred, has required industry-wide programs that courts later scrutinized.

Efficiency Compared

Perfect competition produces where price equals marginal cost, the efficient level, at the lowest average cost in the long run. Monopolistic competition produces a little less, with excess capacity, the cost of variety consumers value. Oligopoly outcomes range from competitive to near-monopoly, depending on how firms interact. Unregulated monopoly restricts output and creates a deadweight loss, which regulation tries to reduce.

Profits in Each Structure

Competitive and monopolistically competitive firms can earn economic profits in the short run, as egg farms did, but entry erodes them in the long run. Oligopolists and monopolists, protected by barriers to entry, can sustain profits, which is why antitrust law and regulation focus on them.

What It Means for Consumers

In competitive markets, consumers are protected by rivalry and entry. In monopolistically competitive markets, they gain variety at somewhat higher prices. In oligopolies, they depend on vigorous competition and antitrust enforcement. In monopolies, they depend on regulators.

Conclusion

One product reveals all four structures. Egg farms behave much like perfect competitors, earning short-run profits that entry erodes; the bakery competes through differentiation; the largest egg producers face the interdependence and antitrust scrutiny of oligopoly; and the water utility is a regulated natural monopoly. Each structure explains why prices and profits differ across businesses that serve the same customers.

References

Chamberlin, E. H. (1933). The theory of monopolistic competition. Harvard University Press.

Lerner, A. P. (1934). The concept of monopoly and the measurement of monopoly power. The Review of Economic Studies, 1(3), 157-175. https://doi.org/10.2307/2967480

Mankiw, N. G. (2021). Principles of microeconomics (9th ed.). Cengage.