6.1 — Demand Differences

How Market Structure Shapes Demand

Not all firms face the same type of demand. The shape and responsiveness of a firm’s demand curve depends heavily on the market structure it operates in. Some firms face strong competition and highly elastic demand, while others face weaker competition and less elastic demand.

These differences help explain why some firms have more control over price than others.

Why Demand Curves Differ

Demand curves differ because of:

• The number of competitors in the market

• The availability of close substitutes

• How easily consumers can switch sellers

The fewer substitutes that exist, the more market power a firm has.

Demand Faced by a Monopolist

A monopolist faces the entire market demand curve, which slopes downward. Because there are no close substitutes, consumers must buy from the monopolist or go without the product.

As a result:

• The monopolist can raise prices without losing all customers

• Higher prices lead to lower quantities demanded

• Price and output decisions are closely linked

This downward-sloping demand curve gives monopolists significant market power compared to firms in more competitive markets.

 

 

 

 

Demand Faced by a Monopolistic Competitor

Monopolistic competitors face a relatively elastic demand curve. Although they sell differentiated products, many close substitutes exist.

This means:

• Firms can raise prices slightly without losing all customers

• Large price increases will cause customers to switch brands

• Non-price competition becomes important

Because demand is elastic, monopolistic competitors rely heavily on branding, quality, and advertising to maintain demand.

 

 

 

Demand Faced by an Oligopolist

Oligopolies are defined by mutual interdependence, meaning each firm’s decisions affect the others.

In many oligopolistic markets, firms face a kinked demand curve:

• If one firm raises its price, competitors do not follow, causing a large loss in sales

• If one firm lowers its price, competitors match the decrease, leading to little gain in sales

This creates two different demand responses depending on price changes.

 

 

 

 

Why Prices Tend to Be Stable in Oligopolies

Because price increases lead to large losses and price decreases bring little benefit, oligopolists often avoid changing prices.

Instead, firms compete using:

• Advertising

• Product features

• Brand loyalty

• Customer service

This explains why prices in oligopolistic markets often remain stable for long periods.

Cooperative Behaviour in Oligopolies

Some oligopolies attempt to increase profits through cooperation.

Forms of cooperation include:

• Price leadership

• Collusion

• Cartels

While some cooperation is legal, explicit collusion and cartels are often illegal because they reduce competition and harm consumers.

Why Demand Differences Matter

Understanding demand differences helps explain:

• Why some firms can raise prices more easily

• Why competition looks different across industries

• Why governments regulate certain markets more closely

Demand conditions play a major role in determining market outcomes and consumer welfare.