Market Structure


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Market Structure

  1. 1. Market Structure
  2. 2. <ul><li>Competition </li></ul><ul><ul><li>Competition creates choices for consumers and keeps prices down. </li></ul></ul><ul><ul><li>This ensures firms remain accountable to consumers. </li></ul></ul><ul><ul><li>Price is an obvious area of competition </li></ul></ul><ul><ul><li>Non-price competition involves changing anything but price. </li></ul></ul>
  3. 3. <ul><li>Market Structure </li></ul><ul><ul><li>Clearly various firms operate within different market structures. </li></ul></ul><ul><ul><li>The market structure influences its decisions regarding price and output. </li></ul></ul><ul><ul><li>There are five factors that help determine market structure. </li></ul></ul><ul><ul><ul><ul><li>The number (and size) of firms in the market </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The degree to which competitors’ products are similar </li></ul></ul></ul></ul><ul><ul><ul><ul><li>A firm’s control over price </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The ease with which firms can enter or leave the market </li></ul></ul></ul></ul><ul><ul><ul><ul><li>The amount of non-price competition </li></ul></ul></ul></ul><ul><ul><li>There are four basic market structures: </li></ul></ul><ul><ul><li>perfect competition, monopolistic competition, oligopoly, and monopoly. </li></ul></ul>
  4. 4. Types of Market Structures Many Producers One Producer Perfect Competition Monopolistic Competition Monopoly Oligopoly
  5. 5. <ul><li>Perfect Competition </li></ul><ul><ul><li>Many producers and a uniform product. </li></ul></ul><ul><ul><li>Many buyers and sellers. Individuals have no control over market supply. </li></ul></ul><ul><ul><li>Products are relatively the same. </li></ul></ul><ul><ul><li>Price Takers </li></ul></ul><ul><ul><li>Relatively east to enter and exit the market. </li></ul></ul><ul><ul><li>Little non-price competition. </li></ul></ul>
  6. 6. <ul><li>Monopolistic Competition </li></ul><ul><ul><li>Many firms. </li></ul></ul><ul><ul><li>Similar but not identical product. </li></ul></ul><ul><ul><li>Firms large enough to influence total supply (some price influence) </li></ul></ul><ul><ul><li>Easy for a new firm to start up </li></ul></ul><ul><ul><li>None price competition is significant </li></ul></ul>
  7. 7. <ul><li>Oligopoly </li></ul><ul><ul><li>It is dominated by a few, very large firms </li></ul></ul><ul><ul><li>Some differentiation depending on the industry. </li></ul></ul><ul><ul><li>Firms freedom to set price varies from slight to substantial. </li></ul></ul><ul><ul><li>Significant barriers to entry. </li></ul></ul><ul><ul><li>Non-price competition can be intense. </li></ul></ul>
  8. 8. <ul><li>Monopoly </li></ul><ul><ul><li>Completely dominated by a single firm. Firm has complete control over total supply. </li></ul></ul><ul><ul><li>The firm produces a unique product, no substitutes. </li></ul></ul><ul><ul><li>Price maker. </li></ul></ul><ul><ul><li>Major barriers to entry </li></ul></ul><ul><ul><li>No direct competitions (need not engage in non-price competition) </li></ul></ul>
  9. 9. <ul><li>Perfect Competition </li></ul><ul><ul><li>The success of a firm depends on how well it manages its costs. </li></ul></ul><ul><ul><li>Firms that are the most efficient will be rewarded with profit. </li></ul></ul><ul><ul><li>How can achieving low costs work against a firm in a perfect competition???? </li></ul></ul><ul><ul><li>Does a perfectly competitive market exist ??? </li></ul></ul>
  10. 10. <ul><li>Monopolistic Competition </li></ul><ul><ul><li>Most prevalent in the service and retail sectors. </li></ul></ul><ul><ul><li>Firms use product differentiation (distinguish their product or service from the competitors) </li></ul></ul><ul><ul><li>How can firms differentiate their products? </li></ul></ul><ul><ul><li>Promotion, Packaging, Location, Services, Quality </li></ul></ul><ul><ul><li>This leads to brand loyalty. </li></ul></ul><ul><ul><li>Think of a company in which you are loyal. Why are you loyal? What has that company done to win your loyalty? </li></ul></ul>
  11. 11. <ul><li>Oligopoly </li></ul><ul><ul><li>At times, observers suspect a price conspiracy exists between some oligopolies (banks, gas stations) </li></ul></ul><ul><ul><li>Consumers push firms to compete on price. </li></ul></ul><ul><ul><li>Sometimes competitors take part in collusion (a secret agreement among firms to set prices, limit output or reduce competition. This is illegal in Canada. </li></ul></ul>
  12. 12. <ul><li>Monopoly </li></ul><ul><ul><li>Copyright law gives writers control of the work they produce. </li></ul></ul><ul><ul><li>Patent law protects inventors and developers of a new product or technology. </li></ul></ul><ul><ul><li>Government contract may produce a monopoly. </li></ul></ul><ul><ul><li>Producers can create a monopoly (professional sports teams) </li></ul></ul><ul><ul><li>Some products particularly those with high fixed costs, are more efficiently produced by a monopoly. This is called a natural monopoly. </li></ul></ul><ul><ul><li>Some monopolies are now being open for market competition through deregulation. </li></ul></ul><ul><ul><li>Privatization involves the sale of public assets to private </li></ul></ul>
  13. 13. <ul><li>Is Bigger Better? </li></ul><ul><ul><li>Capital-intensive production can be more efficient but also results in fewer, very large producers competing as oligopolies. </li></ul></ul><ul><ul><li>Successful firms frequently use profits to expand production by purchasing their competitors. </li></ul></ul><ul><ul><li>Through mergers and takeovers firms reduce the risk of competition by controlling it. </li></ul></ul><ul><ul><li>Without the pressure of competition prices can float upward. </li></ul></ul><ul><ul><li>The benefits of efficient production and economies of scale are more likely to go to the producer as higher profits than to consumers in the form of lower prices. </li></ul></ul>
  14. 14. <ul><li>Third-Party Costs </li></ul><ul><ul><li>Markets are not always good at passing on all the costs of production to those who consume the product. </li></ul></ul><ul><ul><li>Non-monetary costs like pollution are social costs or third-party costs. </li></ul></ul><ul><ul><li>Achieving production efficiency can sometimes lead to the destruction of scarce resources rather than their efficient use. </li></ul></ul>
  15. 15. <ul><li>The Public-Private Balance </li></ul><ul><ul><li>During the three decades after 1960, governments expanded its role as a producer of essential services such as education and health care. </li></ul></ul><ul><ul><li>By 1990 government spending seemed out of control. </li></ul></ul><ul><ul><li>Government cut its spending, its payroll , and its services. </li></ul></ul><ul><ul><li>Did governments make the right choices? </li></ul></ul><ul><ul><li>Should we go further, inviting even more participation of private companies in the delivery of social programs such as health care? </li></ul></ul>
  16. 16. <ul><li>Is Regulation the Answer? </li></ul><ul><ul><li>Markets cannot exist without regulations that define contracts, protect private property and competition, or require certain production standards. </li></ul></ul><ul><ul><li>Regulations must be effectively enforce. </li></ul></ul><ul><ul><li>We would like an economy that responds to our needs, but markets can only respond to demands. </li></ul></ul><ul><ul><li>The difference is the ability to pay the market’s price. </li></ul></ul><ul><ul><li>Considerations of equity rather than efficiency may be more important. </li></ul></ul>