Market Market StructuresStructures

Market StructuresMarket Structures

Type of market structure influences Type of market structure influences how a firm behaves:how a firm behaves: PricingPricing SupplySupply Barriers to EntryBarriers to Entry EfficiencyEfficiency CompetitionCompetition

Market StructuresMarket Structures

Degree of competition in the industry:Degree of competition in the industry: High levels of competition – Perfect High levels of competition – Perfect

CompetitionCompetition Limited Competition – MonopolyLimited Competition – Monopoly Degrees of competition in betweenDegrees of competition in between

Market StructureMarket Structure

Determinants of market structureDeterminants of market structure Freedom of entry and exitFreedom of entry and exit Nature of the product – homogenous Nature of the product – homogenous

(identical) differentiated?(identical) differentiated? Control over supply/outputControl over supply/output Control over priceControl over price Barriers to entryBarriers to entry

Perfect CompetitionPerfect Competition

Free entry and exit to industryFree entry and exit to industry Homogenous product – identical so no Homogenous product – identical so no

consumer preferenceconsumer preference Large number of buyers and sellers – no Large number of buyers and sellers – no

individual seller can influence priceindividual seller can influence price Sellers are price takers – have to accept Sellers are price takers – have to accept

the market pricethe market price Perfect information available to buyers Perfect information available to buyers

and sellersand sellers

Perfect CompetitionPerfect Competition

Examples:Examples: Financial markets – stock Financial markets – stock

exchange, currency markets, bond exchange, currency markets, bond markets?markets?

Agriculture?Agriculture? To what extent?To what extent?

Advantages of Advantages of Perfect CompetitionPerfect Competition

High degree of competition helps allocate High degree of competition helps allocate resources to most efficient useresources to most efficient use

Price = marginal costsPrice = marginal costs Normal profit made in the long runNormal profit made in the long run Firms operate at maximum efficiencyFirms operate at maximum efficiency Consumers benefitConsumers benefit

What happens in a competitive What happens in a competitive environment?environment?

New idea? – firm makes short term New idea? – firm makes short term abnormal profitabnormal profit

Other firms enter the industry to take Other firms enter the industry to take advantage of abnormal profitadvantage of abnormal profit

Supply increases – price fallsSupply increases – price falls Long run – normal profit madeLong run – normal profit made Choice for consumerChoice for consumer Price sufficient for normal profit to be Price sufficient for normal profit to be

made but no more!made but no more!

Monopolistic Monopolistic CompetitionCompetition

Many buyers and sellersMany buyers and sellers Products differentiatedProducts differentiated Relatively free entry and exitRelatively free entry and exit Each firm may have a tiny ‘monopoly’ Each firm may have a tiny ‘monopoly’

because of the differentiation of their because of the differentiation of their productproduct

Firm has some control over priceFirm has some control over price ExamplesExamples – restaurants, professions – – restaurants, professions –

lawyers, doctors, etc.lawyers, doctors, etc.

OligopolyOligopoly

Competition amongst the fewCompetition amongst the few Industry dominated by small number of large Industry dominated by small number of large

firmsfirms Many firms may make up the industryMany firms may make up the industry High barriers to entryHigh barriers to entry Products could be highly differentiated – Products could be highly differentiated –

branding or homogenousbranding or homogenous Non – price competitionNon – price competition Price stability within the marketPrice stability within the market Potential for collusion?Potential for collusion? Abnormal profitsAbnormal profits High degree of interdependence between firmsHigh degree of interdependence between firms

OligopolyOligopoly

Examples of oligopolistic Examples of oligopolistic structures:structures: SupermarketsSupermarkets Banking industryBanking industry ChemicalsChemicals OilOil Medicinal drugsMedicinal drugs BroadcastingBroadcasting

MonopolyMonopoly

Pure monopolyPure monopoly – industry is the firm! – industry is the firm! Actual monopolyActual monopoly – where firm has – where firm has

>25% market share>25% market share Natural MonopolyNatural Monopoly – high fixed costs – – high fixed costs –

gas, electricity, water, gas, electricity, water, telecommunications, railtelecommunications, rail

MonopolyMonopoly

High barriers to entryHigh barriers to entry Firm controls price OR output/supplyFirm controls price OR output/supply Abnormal profits in long runAbnormal profits in long run Possibility of price discriminationPossibility of price discrimination Consumer choice limitedConsumer choice limited Prices in excess of Marginal CostPrices in excess of Marginal Cost

Advantages and Advantages and Disadvantages of MonopoliesDisadvantages of Monopolies

Advantages:Advantages: May be appropriate if natural monopolyMay be appropriate if natural monopoly Encourages R&DEncourages R&D Encourages InnovationEncourages Innovation Development of some products not likely Development of some products not likely

without some guarantee of monopoly in without some guarantee of monopoly in production.production.

Economies of Scale can be gained – consumer Economies of Scale can be gained – consumer may benefitmay benefit

Advantages and Advantages and Disadvantages of Disadvantages of

MonopoliesMonopolies Disadvantages:Disadvantages:

Exploitation of consumer – higher prices, Exploitation of consumer – higher prices, Potential for supply to be limited- less Potential for supply to be limited- less

choicechoice Potential for inefficiency – due to Potential for inefficiency – due to

complacency over controls on costscomplacency over controls on costs