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Market Structure Notes

A market is a venue for buyers and sellers to exchange goods and services, which can be physical or virtual. Market structures are classified based on the degree of competition among firms, including perfect competition, monopolistic competition, oligopoly, and monopoly, each with distinct characteristics and implications for pricing, supply, and market entry. Understanding these structures helps analyze how firms behave and the overall efficiency of the market.

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2 views

Market Structure Notes

A market is a venue for buyers and sellers to exchange goods and services, which can be physical or virtual. Market structures are classified based on the degree of competition among firms, including perfect competition, monopolistic competition, oligopoly, and monopoly, each with distinct characteristics and implications for pricing, supply, and market entry. Understanding these structures helps analyze how firms behave and the overall efficiency of the market.

Uploaded by

jeremiakanunga
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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Market

Structures
What is Market
 A market is where buyers and sellers can meet to facilitate the
exchange or transaction of goods and services.

 Markets can be physical, like a retail outlet, or virtual, like an


e-retailer.

 Examples include illegal markets, auction markets, and


financial markets
What is a Market
Structure?
 The nature and degree of competition among firms in the
same industry
 We classify 4 Market Structures by asking questions like:
Market Structures

 Type of market structure influences how a firm


behaves:
 Pricing
 Supply
 Barriers to Entry
 Efficiency
 Competition
Market Structures

 Degree of competition in the industry


 High levels of competition – Perfect competition
 Limited competition – Monopoly
 Degrees of competition in between
Market Structure

 Determinants of market structure


 Freedom of entry and exit
 Nature of the product – homogenous (identical),
differentiated?
 Control over supply/output
 Control over price
 Barriers to entry
We classify Market Structures
by asking:
1. How much control over price does
each firm have?
2. How many firms are competing in
the market?
3. How large/what size are each of the
firms?
4. What are the characteristics of the
products in each market?
5. How easy is it for new firms to enter
the market?
Market Structures

 Perfect Competition

 Monopolistic Competition

 Oligopoly

 Monopoly
MARKET STRUCTURES:
Perfect Competition

MEETS 5 CONDITIONS:
1. LARGE NUMBER OF BUYERS AND SELLERS
2. BUYERS AND SELLERS DEAL IN IDENTICAL
PRODUCTS
3. BUYERS AND SELLERS ACT INDEPENDENTLY
4. BUYERS AND SELLERS ARE WELL-INFORMED
5. BUYERS AND SELLERS ARE FREE TO ENTER
INTO, CONDUCT, OR GET OUT OF BUSINESS
Market Structure

 Perfect Competition:
 Free entry and exit to industry
 Homogenous product – identical so no
consumer preference
 Large number of buyers and sellers –
no individual seller can influence price
 Sellers are price takers – have to
accept the market price
 Perfect information available to buyers
and sellers
Market Structure

 Examples of perfect competition:

Financialmarkets – stock
exchange, currency markets,
bond markets?
Agriculture?
 To what extent?
Market Structure

 Advantages of Perfect Competition:


 High degree of competition helps
allocate resources to most efficient
use
 Price = marginal costs
 Normal profit made in the long run
 Firms operate at maximum
efficiency
 Consumers benefit
Market Structure

 What happens in a competitive


environment?
 New idea? – firm makes short term
abnormal profit
 Other firms enter the industry to take
advantage of abnormal profit
 Supply increases – price falls
 Long run – normal profit made
 Choice for consumer
 Price sufficient for normal profit to be
made but no more!
Imperfect
Competition-
lacks 1 or more of the 5
conditions
1. MONOPOLISTIC COMPETITION
2. OLIGOPOLY
3. MONOPOLY
Monopolistic
Competition
HAS EVERY CONDITION EXCEPT IDENTICAL PRODUCTS!
THESE FIRMS CAN MONOPOLIZE A SMALL PART OF THE MARKET BY:

1. PRODUCT DIFFERENTIATION – MAKE THEIR PRODUCT SEEM SPECIAL


THROUGH ADS
2. NON-PRICE COMPETITION - USE OF ADVERTISEMENTS, GIVEAWAYS,
PROMOTIONS TO GET YOUR BUSINESS
Market Structure

 Imperfect or Monopolistic Competition


 Many buyers and sellers
 Products differentiated
 Relatively free entry and exit
 Each firm may have a tiny ‘monopoly’
because of the differentiation of their
product
 Firm has some control over price
 Examples – restaurants, professions –
solicitors, etc., building firms –
plasterers, plumbers, etc.
Oligopoly
WHERE FEW VERY LARGE SELLERS
DOMINATE THE INDUSTRY
ANY FIRM WITHIN THIS MARKET
STRUCTURE CAN CAUSE A CHANGE
IN OUTPUT, SALES, OR PRICES

A few control 2/3s of the


industry
Market Structure

 Oligopoly – Competition amongst the


few
 Industry dominated by small number of large
firms
 Many firms may make up the industry
 High barriers to entry
 Products could be highly differentiated –
branding or homogenous
 Non–price competition
 Price stability within the market - kinked demand
curve?
 Potential for collusion?
 Abnormal profits
 High degree of interdependence between firms
Market Structure

 Examples of oligopolistic structures:


 Supermarkets
 Banking industry
 Chemicals
 Oil
 Medicinal drugs
 Broadcasting
Market Structure

 Measuring Oligopoly:
 Concentration ratio – the
proportion of market share
accounted for by top X number of
firms:
 E.g. 5 firm concentration ratio of 80% -
means top 5 five firms account for 80%
of market share
 3 firm CR of 72% - top 3 firms account
for 72% of market share
Market Structure

 Duopoly:
 Industry dominated by two large firms
 Possibility of price leader emerging – rival will
follow price leaders pricing decisions
 High barriers to entry
 Abnormal profits likely
Must use Interdependent
Behavior
COLLUSION:

A formal agreement to set prices or limit output, acting as one


company.

PRICE WARS:
When one firm lowers prices other firms will follow in a series of price
cuts that result in unusually low prices
Monopoly The federal
MARKET STRUCTURE
government has
WITH ONLY
outlawed
1 SELLER OF A
monopolies for
PARTICULAR PRODUCT
over 100 years.
Trustbusting
T.R. and the
Sherman Anti-
Trust Act
started it off!
Natural
Monopoly
-A MARKET SITUATION WHERE COSTS OF PRODUCTION ARE
MINIMIZED BY HAVING A SINGLE FIRM PRODUCE THE PRODUCT
Geographic Monopoly
A MONOPOLY BASED ON
ABSENCE OF OTHER SELLERS

LUCK OF LOCATION!!!

Example: Thruway gas


stations!!
Technological
Monopoly
BASED ON THE OWNERSHIP OF A METHOD
OF PRODUCTION, SCIENTIFIC ADVANCE,
METHOD OR PROCESS
•Patents - granted by government, exclusive right to
manufacture, use, or sell any new and useful
Invention

•Copyrights - given to art or literary work and is


exclusive right of artist to publish, sell, or reproduce
for their lifetime plus 70 years
Government
Monopoly
GOVERNMENT OWNS AND OPERATES A MONOPOLY
AT NATIONAL, STATE AND LOCAL LEVELS
Market Structure

 Monopoly:
 Pure monopoly – industry is the firm!
 Actual monopoly – where firm has >25% market
share
 Natural Monopoly – high fixed costs – gas,
electricity, water, telecommunications, rail
Market Structure

 Monopoly:
 High barriers to entry
 Firm controls price OR output/supply
 Abnormal profits in long run
 Possibility of price discrimination
 Consumer choice limited
 Prices in excess of MC
Market Structure

 Advantages and disadvantages of


monopoly:
 Advantages:
 May be appropriate if natural
monopoly
 Encourages R&D
 Encourages innovation
 Development of some products not
likely without some guarantee of
monopoly in production
 Economies of scale can be gained –
consumer may benefit
Market Structure

 Disadvantages:
 Exploitation of consumer – higher prices
 Potential for supply to be limited - less choice
 Potential for inefficiency –

X-inefficiency – complacency over


controls on costs
Market Structure

Monopsony
 Single Buyer: The defining feature is the
presence of only one buyer in the
market.

 Many Sellers: Typically, there are many


sellers, who are individually insignificant
and have limited bargaining power.

 Price Control: The monopsonist can


influence the price of the good or service
by adjusting the quantity they purchase.

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