Market Structure in the Information Economy

Phil Ruder, Pacific University, Forest Grove, OR
Initial Publication Date: August 19, 2018

Summary

Student teams predict whether market structures in the information economy will likely be competitive or not.

Used this activity? Share your experiences and modifications

Context for Use

The activity is appropriate for principles of microeconomics, intermediate microeconomics, and industrial organization courses.
Students should have studied firm production and cost, along with a range of market structures that include oligopoly and monopolistic competition.
The activity, including debriefing, will take between 30 and 40 minutes.
There is no limitation on the class size in which the exercise would be effective.

Overview

This activity asks teams to predict whether firms in the information economy are likely to sell their products in monopolistically competitive markets or whether those firms are likely to have significant market power. Students will develop an understanding of the genesis of scale economies and the ramification of scale economies for market structure.

Expected Student Learning Outcomes

In this exercise, students will develop their ability to explain which production technologies result in important economies of scale and to predict the effect of economies of scale on the structure of the market in which a product produced with economies of scale is traded.

Information Given to Students

I project this application exercise around the room and students have A, B, C, D cards with which to report.
The text of the exercise is as follows:

Increasingly, we live in an "information economy," where products like software, music, and movies require a great deal of effort to bring into existence but then can be produced with very low marginal costs.

What do you predict will happen to the overall competitiveness of industries in the economy given the shift toward information-intensive activities?

A. Markets will become more competitive as costs of production fall.
B. Competition will diminish as bigger companies have an advantage.
C. Monopolistic competition will become an even more common market structure.

Teaching Notes and Tips

This AE drew student team responses across all three answers. Teams predicting increased competition cited a number of retail sectors in which barriers to entry were falling due to the emergence of Internet selling to niche markets.
In the debriefing, I moved the conversation to one about when we would expect highly concentrated industry sectors to emerge and what conditions might foster a competitive market situation.

Assessment

Assessment occurs when similar questions are asked on end-of-module quizzes and the final exam.