Market	  Structure	  
Market	  Structure	  •  Market	  structure	  –	  iden0fies	  how	  a	  market	  	     is	  made	  up	  in	  terms	  of:	   ...
Market	  Structure	    Perfect                                                PureCompetition                             ...
Market Structure  Perfect                                          PureCompetition                                      Mo...
Market Structure                                                                           Pure  Perfect                  ...
Market	  Structure	  •  Characteris*cs	  of	  each	  model:	      –  Number	  and	  size	  of	  firms	  that	  make	  up	  ...
Perfect	  Compe00on	  •  One	  extreme	  of	  the	  market	  structure	  spectrum	  •  Characteris*cs:	       –  Large	  n...
Monopolis*c	  or	  Imperfect	  Compe**on	  •  Where	  the	  condi0ons	  of	  perfect	  compe00on	  do	     not	  hold,	  ‘...
Monopolis0c	  or	  Imperfect	  Compe00on	  •  Characteris*cs:	     –  Large	  number	  of	  firms	  in	  the	  industry	   ...
Monopolis*c	  or	  Imperfect	  Compe**on	                              	  •  There	  are	  many	  firms	  in	  the	  indust...
Oligopoly	  •  Compe00on	  between	  the	  few	      –  May	  be	  a	  large	  number	  of	  firms	  in	  the	  industry	  ...
Oligopoly	  •  Example:	                                                                                                  ...
Oligopoly	  •  Features	  of	  an	  oligopolis0c	  market	  structure:	      –  Price	  may	  be	  rela0vely	  stable	  ac...
Duopoly	  •  Market	  structure	  where	  the	  industry	  is	     dominated	  by	  two	  large	  producers	      –  Price...
Monopoly	  •  Pure	  monopoly	  –	  where	  only	  	     one	  producer	  exists	  in	  the	  industry	  •  In	  reality,	...
Monopoly	  •  Monopoly	  power	  –	  refers	  to	  cases	  where	  firms	  influence	     the	  market	  in	  some	  way	  t...
Monopoly	  •  Origins	  of	  monopoly:	     –  Through	  growth	  of	  the	  firm	     –  Through	  amalgama0on,	  merger	 ...
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Market structure

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Market structure

  1. 1. Market  Structure  
  2. 2. Market  Structure  •  Market  structure  –  iden0fies  how  a  market     is  made  up  in  terms  of:   –  The  number  of  firms  in  the  industry   –  The  nature  of  the  product  produced   –  The  degree  of  monopoly  power  each  firm  has   –  The  degree  to  which  the  firm  can  influence  price   –  Profit  levels   –  Firms’  behaviour  –  pricing  strategies,  non-­‐price  compe00on,  output   levels       –  The  extent  of  barriers  to  entry   –  The  impact  on  efficiency  
  3. 3. Market  Structure   Perfect PureCompetition Monopoly More competitive (fewer imperfections)
  4. 4. Market Structure Perfect PureCompetition Monopoly Less competitive (greater degree of imperfection)
  5. 5. Market Structure Pure Perfect MonopolyCompetition Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale, the greater the degree of monopoly power exercised by the firm.
  6. 6. Market  Structure  •  Characteris*cs  of  each  model:   –  Number  and  size  of  firms  that  make  up     the  industry   –  Control  over  price  or  output   –  Freedom  of  entry  and  exit  from  the  industry   –  Nature  of  the  product  –  degree  of  homogeneity  (similarity)   of  the  products  in  the  industry  (extent  to  which  products   can  be  regarded  as  subs0tutes  for  each  other)   –  Diagramma0c  representa0on  –  the  shape     of  the  demand  curve,  etc.  
  7. 7. Perfect  Compe00on  •  One  extreme  of  the  market  structure  spectrum  •  Characteris*cs:   –  Large  number  of  firms   –  Products  are  homogenous  (iden0cal)  –  consumer     has  no  reason  to  express  a  preference  for  any  firm   –  Freedom  of  entry  and  exit  into  and  out     of  the  industry   –  Firms  are  price  takers  –  have  no  control     over  the  price  they  charge  for  their  product   –  Each  producer  supplies  a  very  small  propor0on     of  total  industry  output   –  Consumers  and  producers  have  perfect  knowledge  about  the  market  
  8. 8. Monopolis*c  or  Imperfect  Compe**on  •  Where  the  condi0ons  of  perfect  compe00on  do   not  hold,  ‘imperfect  compe00on’  will  exist  •  Varying  degrees  of  imperfec0on  give  rise  to   varying  market  structures  •  Monopolis0c  compe00on  is  one  of  these  –  not  to   be  confused  with  monopoly!  
  9. 9. Monopolis0c  or  Imperfect  Compe00on  •  Characteris*cs:   –  Large  number  of  firms  in  the  industry   –  May  have  some  element  of  control  over  price  due  to  the   fact  that  they  are  able  to  differen0ate  their  product  in   some  way  from  their  rivals     –  products  are  therefore  close,  but  not  perfect,  subs0tutes   –  Entry  and  exit  from  the  industry  is  rela0vely  easy     –  few  barriers  to  entry  and  exit   –  Consumer  and  producer  knowledge  imperfect  
  10. 10. Monopolis*c  or  Imperfect  Compe**on    •  There  are  many  firms  in  the  industry  •  Each  can  try  to  differen0ate  its  product    in  some  way  •  Entry  and  exit  to  the  industry  is  rela0vely  free  •  Consumers  and  producers  do  not  have  perfect  knowledge  of   the  market    •  The  market  may  indeed  be  rela0vely  localised.    
  11. 11. Oligopoly  •  Compe00on  between  the  few   –  May  be  a  large  number  of  firms  in  the  industry  but  the   industry  is  dominated     by  a  small  number  of  very  large  producers  •  Concentra*on  Ra*o  –  the  propor0on  of  total  market   sales  (share)  held  by  the  top  3,4,5,  etc  firms:   –  A  4  firm  concentra0on  ra0o  of  75%  means  the  top  4  firms   account  for  75%  of  all     the  sales  in  the  industry  
  12. 12. Oligopoly  •  Example:   The music industry has•  Music  sales  –       a 5-firm concentration ratio of 75%. Independents make up 25% of the market but there could be many thousands of firms that make up this ‘independents’ group. An oligopolistic market structure therefore may have many firms in the industry but it is dominated by a few large sellers. Market Share of the Music Industry 2002. Source IFPI: http://www.ifpi.org/site-content/press/20030909.html
  13. 13. Oligopoly  •  Features  of  an  oligopolis0c  market  structure:   –  Price  may  be  rela0vely  stable  across  the  industry     –  Behaviour  of  firms  affected  by  what  they  believe  their   rivals    might  do     –  Interdependence  of  firms   –  Goods  could  be  homogenous  or  highly  differen0ated   –  Branding  and  brand  loyalty  may  be  a  potent  source  of   compe00ve  advantage   –  Non-­‐price  compe00on  may  be  prevalent   –  AC  curve  may  be  saucer  shaped     –  Minimum  efficient  scale    could  occur  over  large  range   of  output   –  High  barriers  to  entry  
  14. 14. Duopoly  •  Market  structure  where  the  industry  is   dominated  by  two  large  producers   –  Price  leadership  by  the  larger  of  the  two  firms  may  exist  –  the   smaller  firm  follows  the  price  lead  of  the  larger  one   –  Highly  interdependent   –  High  barriers  to  entry  
  15. 15. Monopoly  •  Pure  monopoly  –  where  only     one  producer  exists  in  the  industry  •  In  reality,  rarely  exists  –  always     some  form  of  subs0tute  available!  •  Monopoly  exists,  therefore,   where  one  firm  dominates  the  market  •  Firms  may  be  inves0gated  for  examples  of   monopoly  power  when  market  share  exceeds   25%  
  16. 16. Monopoly  •  Monopoly  power  –  refers  to  cases  where  firms  influence   the  market  in  some  way  through  their  behaviour  –   determined  by  the  degree  of  concentra0on  in  the  industry   –  Influencing  prices   –  Influencing  output   –  Pricing  strategies  to  prevent  or  s0fle  compe00on   –  May  not  pursue  profit  maximisa0on     –  Encourages  unwanted  entrants  to  the  market   –  Some0mes  seen  as  a  case  of  market  failure  
  17. 17. Monopoly  •  Origins  of  monopoly:   –  Through  growth  of  the  firm   –  Through  amalgama0on,  merger     or  takeover   –  Through  acquiring  patent  or  license   –  Through  legal  means  –  Royal  charter,   na0onalisa0on,  wholly  owned  group  

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