structure

structure - Transcript

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Market Structures

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Market Structures
Type of market structure influences how a firm behaves
Pricing Supply Barriers to Entry Efficiency Competition

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Market Structures
Degree of competition in the industry High levels of competition Perfect competition Limited competition Monopoly Degrees of competition in between

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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

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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

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Market Structure
Examples of perfect competition Financial markets stock exchange currency markets bond markets Agriculture To what extent

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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

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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

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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

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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

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Market Structure
Examples of oligopolistic structures
Supermarkets Banking industry Chemicals Oil Medicinal drugs Broadcasting

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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

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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
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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

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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
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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

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Market Structure
Disadvantages
Exploitation of consumer higher prices Potential for supply to be limited less choice Potential for inefficiency

controls on costs

X inefficiency complacency over

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Price

Market Structure
Kinked Demand Curve

5

Kinked D Curve D Inelastic
100

D elastic

Quantity
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