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MARKET STRUCTURE
Summarized from
Managerial Economics
Dominick Salvatore
Market structure and
degree of competition
• The process by which price and output are determined in the real
world is strongly affected by the structure of the market
• A market consists of all the potential buyers and sellers of a
particular product
• Market structure refers to the competitive environment in which the
buyers and sellers of a product operate.
• 4 different types of market structure:
– Perfect competition
– Monopoly
– Monopolistic competition
– Oligopoly
Perfect competition:
form of market organization in which
• There are many buyers and sellers of a product, each too
small to affect the price of the product (price taker)
• The product is identical, or homogenous
• There is perfect mobility of resources
• Economic agents have perfect knowledge of market
conditions
• The market price of a product is determined at
intersection of market demand curve and market supply
curve of the product
Perfect competition:
form of market organization in which
• The best level of output of a firm in the short run is given at
the point at which P or MR = MC  P > AVC
• At the best level of output,
– When AVC < P < TVC  loss but it would be even greater if
it stopped producing
– The shut down point for the firm is at P = AVC
Monopoly:
the form of market organization in which
• A single firm sells a product for which there are no close substitutes.
• Entry into the industry is very difficult or impossible (as evidenced by
the fact that there is but a single firm in the industry)
• The monopolist faces a market demand curve for the product that is
negatively sloped and MR <P
• Monopoly can arise from several causes:
– The firm may own a patent or copyright that precludes other firms from
producing the same product
– In some industries, increasing return to scale may operate over such a
wide range of outputs as to leave only one firm producing the product 
Natural Monopoly: fairly common in the areas of public utilities and
transportation
Monopoly:
the form of market organization in which
• In SR, the best level of output of a monopolist is
at the point at which MR = MC, as long as P >
AVC.
• In LR, the monopolist can build the optimal scale
of plant to produce the best level of output.
• Because of blocked entry, a monopolist can earn
LR profits
Monopolistic Competition:
the form of market organization in which
• There are many sellers of a differentiated product
– product differentiation. A strategy that firms use to achieve
market power. Accomplished by producing products that have distinct
positive identities in consumers’ minds.
• Entry into or exit from the industry is rather easy in LR
• Demand curve facing a monopolistic competitor is
negatively sloped but highly price elastic.
• The best level of output in SR is given at the point at which
MR = MC, provided that P > AVC
Monopolistic Competition:
the form of market organization in which
• The firm under this structure can earn profit, break even or incur
losses in SR.
– If firms earn profits, more firms enter the market in LR. This shifts the
demand curve facing each firm to the left ( as its market share declines)
until all firms break even.
• Since D curve facing a monopolistic competitor is negatively sloped,
price and LAC are somewhat higher than under perfect competition
– Thus each firm operates with excess capacity, and this allows more firms
(overcrowding) to exist in the market
• A monopolistically competitive firm can increase the degree of
product variation well as its selling expenses in an effort to increase
the D for its product and make the D less elastic
– The optimal level of these efforts is given by the point at which MR = MC
MONOPOLISTIC COMPETITION
TABLE 14.1 Percentage of Value of Shipments Accounted for by the
Largest Firms in Selected Industries, 1997
INDUSTRY
DESIGNATION
FOUR
LARGEST
FIRMS
EIGHT
LARGEST
FIRMS
TWENTY
LARGEST
FIRMS
NUMBER
OF
FIRMS
Travel trailers and campers 26 36 50 761
Dolls 31 51 66 239
Wood office furniture 34 42 55 639
Book printing 32 45 59 890
Curtains and draperies 26.5 36.3 50.1 2012
Fresh or frozen seafood 13.6 22.9 42.2 586
Women’s dresses 14.2 23.7 39.4 747
Miscellaneous plastic products 5 8 14 7522
Source: U.S. Department of Commerce, Bureau of the Census, 1997 Census of Manufacturers, Concentration Ratios in Manufacturing. Subject
Series EC92m315, June, 2001.
Firms in a monopolistically competitive industry are small relative to the total market. New
firms can enter the industry in pursuit of profit, and relatively good substitutes for the firms’
products are available. Firms in monopolistically competitive industries try to achieve a
degree of market power by differentiating their products—by producing something new,
different, or better, or by creating a unique identity in the minds of consumers.
Oligopoly:
the form of market organization in which
• There are few sellers of homogenous or differentiated
product.
• While entry into the industry is possible, it is not easy ( as
evidenced by the limited number of firms in the industry).
• Referred to as imperfect competition or market together
with monopoly and monopolistic competition
Oligopoly:
the form of market organization in which
• The most prevalent form of market organization in the
manufacturing sector of industrial countries, including US
– The degree of prevalence can be measured by concentration ratios
• The distinguishing characteristics of oligopoly are the
interdependence and rivalry among the firms in the industry
Many models of oligopoly:
each based on the particular behavioral response of
competitors
– The kinked demand curve model seeks to explain the
price rigidity often encountered in oligopolistic
markets
– The centralized cartel model can lead to the
monopoly solution
– The model of price leadership by the dominant firm
In SR Oligopolist continues to produce even if it incurs a loss, as long as P > AVC,
In LR, an oligopolist is not likely to produce at the lowest point on its LAC curve and
can earn profits because of restricted entry into the industry
Although not every industry fits neatly into one of these categories,
the categories do provide a useful and convenient framework for
thinking about industry structure and behavior.
Characteristics of
Different Market Organizations

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Market structure in English

  • 1. MARKET STRUCTURE Summarized from Managerial Economics Dominick Salvatore
  • 2. Market structure and degree of competition • The process by which price and output are determined in the real world is strongly affected by the structure of the market • A market consists of all the potential buyers and sellers of a particular product • Market structure refers to the competitive environment in which the buyers and sellers of a product operate. • 4 different types of market structure: – Perfect competition – Monopoly – Monopolistic competition – Oligopoly
  • 3. Perfect competition: form of market organization in which • There are many buyers and sellers of a product, each too small to affect the price of the product (price taker) • The product is identical, or homogenous • There is perfect mobility of resources • Economic agents have perfect knowledge of market conditions • The market price of a product is determined at intersection of market demand curve and market supply curve of the product
  • 4. Perfect competition: form of market organization in which • The best level of output of a firm in the short run is given at the point at which P or MR = MC  P > AVC • At the best level of output, – When AVC < P < TVC  loss but it would be even greater if it stopped producing – The shut down point for the firm is at P = AVC
  • 5. Monopoly: the form of market organization in which • A single firm sells a product for which there are no close substitutes. • Entry into the industry is very difficult or impossible (as evidenced by the fact that there is but a single firm in the industry) • The monopolist faces a market demand curve for the product that is negatively sloped and MR <P • Monopoly can arise from several causes: – The firm may own a patent or copyright that precludes other firms from producing the same product – In some industries, increasing return to scale may operate over such a wide range of outputs as to leave only one firm producing the product  Natural Monopoly: fairly common in the areas of public utilities and transportation
  • 6. Monopoly: the form of market organization in which • In SR, the best level of output of a monopolist is at the point at which MR = MC, as long as P > AVC. • In LR, the monopolist can build the optimal scale of plant to produce the best level of output. • Because of blocked entry, a monopolist can earn LR profits
  • 7. Monopolistic Competition: the form of market organization in which • There are many sellers of a differentiated product – product differentiation. A strategy that firms use to achieve market power. Accomplished by producing products that have distinct positive identities in consumers’ minds. • Entry into or exit from the industry is rather easy in LR • Demand curve facing a monopolistic competitor is negatively sloped but highly price elastic. • The best level of output in SR is given at the point at which MR = MC, provided that P > AVC
  • 8. Monopolistic Competition: the form of market organization in which • The firm under this structure can earn profit, break even or incur losses in SR. – If firms earn profits, more firms enter the market in LR. This shifts the demand curve facing each firm to the left ( as its market share declines) until all firms break even. • Since D curve facing a monopolistic competitor is negatively sloped, price and LAC are somewhat higher than under perfect competition – Thus each firm operates with excess capacity, and this allows more firms (overcrowding) to exist in the market • A monopolistically competitive firm can increase the degree of product variation well as its selling expenses in an effort to increase the D for its product and make the D less elastic – The optimal level of these efforts is given by the point at which MR = MC
  • 9. MONOPOLISTIC COMPETITION TABLE 14.1 Percentage of Value of Shipments Accounted for by the Largest Firms in Selected Industries, 1997 INDUSTRY DESIGNATION FOUR LARGEST FIRMS EIGHT LARGEST FIRMS TWENTY LARGEST FIRMS NUMBER OF FIRMS Travel trailers and campers 26 36 50 761 Dolls 31 51 66 239 Wood office furniture 34 42 55 639 Book printing 32 45 59 890 Curtains and draperies 26.5 36.3 50.1 2012 Fresh or frozen seafood 13.6 22.9 42.2 586 Women’s dresses 14.2 23.7 39.4 747 Miscellaneous plastic products 5 8 14 7522 Source: U.S. Department of Commerce, Bureau of the Census, 1997 Census of Manufacturers, Concentration Ratios in Manufacturing. Subject Series EC92m315, June, 2001. Firms in a monopolistically competitive industry are small relative to the total market. New firms can enter the industry in pursuit of profit, and relatively good substitutes for the firms’ products are available. Firms in monopolistically competitive industries try to achieve a degree of market power by differentiating their products—by producing something new, different, or better, or by creating a unique identity in the minds of consumers.
  • 10. Oligopoly: the form of market organization in which • There are few sellers of homogenous or differentiated product. • While entry into the industry is possible, it is not easy ( as evidenced by the limited number of firms in the industry). • Referred to as imperfect competition or market together with monopoly and monopolistic competition
  • 11. Oligopoly: the form of market organization in which • The most prevalent form of market organization in the manufacturing sector of industrial countries, including US – The degree of prevalence can be measured by concentration ratios • The distinguishing characteristics of oligopoly are the interdependence and rivalry among the firms in the industry
  • 12. Many models of oligopoly: each based on the particular behavioral response of competitors – The kinked demand curve model seeks to explain the price rigidity often encountered in oligopolistic markets – The centralized cartel model can lead to the monopoly solution – The model of price leadership by the dominant firm In SR Oligopolist continues to produce even if it incurs a loss, as long as P > AVC, In LR, an oligopolist is not likely to produce at the lowest point on its LAC curve and can earn profits because of restricted entry into the industry
  • 13. Although not every industry fits neatly into one of these categories, the categories do provide a useful and convenient framework for thinking about industry structure and behavior. Characteristics of Different Market Organizations