Market structures economics unit 1 module 1

1. By Dervette Mignott & RayAnna Smith
EXPLORING PRICE DISCRIMINATION &
MONOPOLISTIC COMPETITION
Market Structures

2. TABLE OF CONTENTS
01
02
03
Introduction to Market
Structures
Price Discrimination
Monopolistic Competition

3. 01
INTRODUCTION

4. WHAT ARE MARKET STRUCTURES?
Market structure in economics refers to the organizational characteristics and
arrangement of a market, determining the degree of competition and the behavior of
firms within it.
The key elements influencing market structure include the number and size,
distribution of firms, the nature of the products or services offered, entry and exit
barriers, and the degree of product differentiation. Common market structures include
perfect competition, monopolistic competition, oligopoly, and monopoly.
The two we’ll be exploring are:
● Price Discrimination
● Monopolistic Competition

5. PRICE DISCRIMINATION
02

6. WHAT IS PRICE DISCRIMINATION?
Price Discrimination in a market structure means that businesses charge different
prices to different customers for the same product or service. This is based on factors
such as the customer's willingness to pay, preferences, or other characteristics. The
goal is to maximize overall profit by customizing prices for various customer groups.
Examples of Price Discrimination:
● Airline Tickets: Airlines often charge different prices for seats on the same flight
based on factors such as booking time, demand, and class of service.
● Movie Theaters: Theatres may offer discounts for seniors, students, or specific
showtimes to attract different customer segments.

7. Economies of Scale
A large, established firm in an industry may
benefit from economies of scale, which
means that the cost per unit decreases as
production increases. New entrants may find
it challenging to match the cost efficiency of
the established firm.
Firms with economies of scale can more
easily afford to offer different prices to
different segments of consumers. They can
exploit their cost advantages to set prices
that vary based on the characteristics and
willingness to pay of different customer
groups.
BARRIERS TO ENTRY
Brand Loyalty
Established brands often enjoy customer
loyalty, which can be built over time through
advertising, product quality, and positive
consumer experiences. New entrants may
struggle to gain the trust and loyalty that
established brands have.
Brands with strong customer loyalty can
implement price discrimination by charging
premium prices to loyal customers who are
willing to pay more. This is often seen in
industries such as technology, where loyal
customers may pay higher prices for the
latest products.

8. Access to Distribution Channels
Existing firms may have well-established
distribution networks, relationships with
retailers, and shelf space. New entrants may
find it difficult to secure the same level of
access to distribution channels.
Firms with control over distribution
channels can use this advantage to segment
markets and implement price
discrimination. They may negotiate different
pricing arrangements with different
distributors or retailers, allowing for varied
pricing strategies.
BARRIERS TO ENTRY cont’d
Government Regulations
Some industries are subject to strict
government regulations, such as licensing
requirements or safety standards.
Compliance with these regulations can be
costly and time-consuming.
Regulatory barriers can limit the number of
firms in an industry and create a more
controlled market environment. In such
cases, firms may have more leeway to
engage in price discrimination without fear
of new entrants challenging their
strategies.

9. CONTROL OVER MARKET & PRICE
● Market Segmentation
Price discrimination relies on the ability to segment the market into distinct groups of
consumers with different willingness to pay. Businesses use demographic, geographic,
psychographic, or behavioral factors to identify segments and tailor prices accordingly.
● Product Differentiation
Creating perceived differences in products allows businesses to justify price variations.
By offering different product versions or features, they can appeal to different market
segments, each willing to pay a specific price for the perceived added value.
● Geographic Price Discrimination
Businesses can set different prices for the same product or service in different
geographic regions based on local market conditions, consumer income levels, or
competitive dynamics.

10. CONTROL OVER MARKET & PRICE cont’d
● Customer Loyalty Programs
Rewarding loyal customers with discounts, exclusive offers, or personalized benefits
encourages repeat business. By identifying and rewarding high-value customers,
businesses can maintain customer loyalty and potentially charge premium prices.
● Dynamic Pricing
Using dynamic pricing algorithms, businesses can adjust prices in real-time based on
factors such as demand, inventory levels, competitor pricing, and customer behavior.
This allows for rapid response to market changes and optimization of pricing strategies.
● Predatory Pricing
In some cases, businesses may engage in predatory pricing by temporarily setting prices
below cost to drive competitors out of the market. Once competitors exit, the business
can raise prices to recoup losses.

11. NATURE OF THE GOOD IN THIS MARKET
Differentiated Products
Goods in such markets are
often differentiated,
meaning that there are
variations in the product
that allow sellers to target
different customer
segments.
These differences could be
in terms of quality,
features, branding, or
packaging.
Versioning or Bundling
Businesses may offer
different versions of a
product or bundling
products, creating
opportunities for price
discrimination.
This allows them to cater to
varying customer
preferences and willingness
to pay for different product
configurations.
Customizable Features
Products with
customizable features or
optional add-ons are more
amenable to price
discrimination.
Businesses can charge
different prices for the base
product and additional
features or services based
on customer preferences.

12. NATURE OF THE GOOD IN THIS MARKET cont’d
Seasonal or Time-Based
Variability
Goods with seasonal
demand fluctuations or
time-based variability can
be subject to price
discrimination.
Prices may vary based on
the time of purchase, with
businesses adjusting prices
to capture different
consumer segments during
peak and off-peak periods.
Durable vs. Perishable
Durable goods, which have a
longer lifespan, and
perishable goods, which have
a limited shelf life, can both
be subject to price
discrimination.
Businesses may discount
prices for perishable goods
to avoid inventory spoilage
and adjust prices for durable
goods based on consumer
demand elasticity.
Brand Loyalty and Image
Goods associated with
strong brand loyalty and
image are often prime
candidates for price
discrimination.
Consumers may be willing
to pay a premium for
products with a
well-established brand,
allowing businesses to set
higher prices for these
goods.

13. NUMBER OF BUYERS & SELLERS IN THIS MARKET
● Buyers
In a price discrimination market
structure, the number of customers and
their buying behavior can vary
significantly depending on the specific
characteristics of the market and the
pricing strategies employed by the firms.
● Sellers
There is no fixed number of firms that
"normally" practice price discrimination,
as it depends on various factors such as
the nature of the industry, the type of
product or service, and the market
conditions.
Certain industries are more prone to price discrimination due to factors such as different
levels of demand elasticity among consumers, the ability to segment markets, or varying
production costs.

14. COMPETITIVE BEHAVIOUR
● Profit Maximization
Firms practicing price discrimination maximize profits by targeting consumer segments
with different price sensitivities, extracting maximum value and optimizing overall
revenue.
● Innovation for Competitive Edge
Price-discriminating firms maintain a competitive edge through innovation and product
differentiation, justifying price variations with unique features.
● Precision in Segmentation
Utilizing market segmentation and targeting, these firms tailor pricing strategies to
specific consumer segments, achieving a more precise approach aligned with diverse
preferences.

15. PERFORMANCE
Short-term profits: Firms engaging in price discrimination can experience immediate
financial gains by extracting more value from diverse customer segments, leading to
increased short-term profits.
Long-term profits: Price discrimination can boost long-term profits by tailoring prices to
different market segments, capturing additional consumer surplus, and fostering
sustained profitability over time.
Innovation and variety: Price discrimination may encourage innovation and product
variety as firms invest in research and development to differentiate products and meet
diverse consumer preferences.
Inefficiency: Price discrimination can introduce inefficiencies due to complexities in
pricing strategies, requiring sophisticated systems for identifying and targeting customer
segments, and potentially leading to higher administrative and marketing costs.

16. MONOPOLISTIC
COMPETITION
03

17. WHAT IS MONOPOLISTIC COMPETITION?
Monopolistic competition refers to a market condition wherein the firms have numerous
competitors, and each one of them sells a different product or service. This type of
markets is defined by the combination of the elements of Competitive and Monopolistic
markets. Since it offers freedom of entry and exit to firms the need to differentiate one’s
products and services becomes very important to stand out from the crowd.
Examples of Monopolistic Competition
● TV programmes – globalisation has increased the diversity of tv programmes from
networks around the world. Consumers can choose between domestic channels but
also imports from other countries and new services, such as Netflix.
● Restaurants – restaurants compete on quality of food as much as price. Product
differentiation is a key element of the business. There are relatively low barriers to
entry in setting up a new restaurant.

18. Economies of Scale
In monopolistic competition, firms can
achieve economies of scale by increasing
their production and lowering their
average costs. This can lead to a natural
monopoly situation where a large firm
gets cost advantages that smaller firms
do not have.
However, if you merge different brands,
there may be economies of scale. You can
devote more resources and investment to
improving that particular product and
maximizing its efficiency.
BARRIERS TO ENTRY
Product Differentiation
In monopolistic competition, firms often
engage in product differentiation to make
their products unique in the eyes of
consumers.
This can involve investing in research and
development to create new features,
designs, or functionalities.
The barrier here lies in the resources and
creativity required to produce a product
that stands out in a crowded market .

19. Brand Loyalty
Established brands benefit from
consumer trust and loyalty.
This loyalty is often built over time
through consistent product quality and
positive experiences.
Breaking into a market where consumers
already have strong brand preferences
can be challenging for new entrants,
requiring significant efforts and
investment to build a comparable level of
trust.
BARRIERS TO ENTRY
Regulatory Compliance
Compliance with industry regulations
and standards is crucial.
Existing firms may have already invested
in meeting these requirements, giving
them a competitive advantage.
New entrants may face hurdles in
understanding and meeting regulatory
standards, leading to delays and
additional costs.

20. CONTROL OVER MARKET & PRICE
In monopolistic competition, firms possess some control over both market position and
pricing. This control stems from the unique features and branding associated with their
products. While firms have the ability to set their own prices within certain limits, they
face competitive pressures from other firms producing similar but differentiated goods.
Product differentiation, branding, and advertising are key tools used by firms to
influence consumer preferences and establish a degree of market power. However, due to
the presence of many competing firms, consumers have alternatives, and excessive
price increases are likely to result in a loss of market share.
In this dynamic environment, firms continually adjust their strategies to maintain a
competitive edge and respond to changing consumer demands

21. CONTROL OVER MARKET AND PRICE cont’d
● Product Differentiation
Firms in monopolistic competition produce differentiated products, meaning each
firm's product is distinct in some way from its competitors. This differentiation
gives each firm some control over the price it charges, as consumers may perceive
differences in value between products.
● Advertising and Branding
Firms often invest in advertising and branding to create a perception of
uniqueness and quality for their products. This can influence consumer
preferences and give firms more control over the prices they charge. However, these
efforts require ongoing investment

22. NATURE OF THE GOOD IN THIS MARKET
.
The nature of goods in monopolistic
competition is characterized by
differentiation, brand identity,
non-price competition, and short run
and long run changes etc.
These characteristics create a dynamic
market where firms continuously strive
to innovate and differentiate their
products to meet changing consumer
preferences.
.

23. NATURE OF THE GOOD IN THIS MARKET cont’d
Product Differentiation
Each firm produces goods
or services that are close
substitutes for the goods
or services produced by
other firms.
They differentiate their
similar products with
distinct marketing
strategies, brand names,
and slightly different
quality levels
Non-Price
Competition
Firms often use distinct
marketing strategies and
branding to distinguish
their products.
This could include factors
like aggressive advertising,
product development,
better distribution,
after-sale services, etc.
Short-Run and
Long-Run Changes
In the short run, firms may
have more flexibility to
adjust prices based on
factors like changes in
demand.
However, in the long run, the
entry of new firms and the
exit of existing ones can
impact the overall market
dynamics.

24. NUMBER OF BUYERS & SELLERS IN THIS MARKET
● Buyers
Similarly, there are many buyers in the
market, and no single buyer has a
significant influence on the overall
market demand. This distinguishes
monopolistic competition from
monopsony, where there is only one buyer.
● Sellers
There are many sellers or firms in the
market, each producing a differentiated
product. This large number of sellers
distinguishes monopolistic competition
from monopoly, where there is only one
seller.
Numerous buyers have a variety of product options with slight differences, as many
sellers populate the market, each offering differentiated products. This structure allows
for consumer choice and promotes product diversity among competing firms.

25. COMPETITIVE BEHAVIOUR
● Product Differentiation
Firms differentiate their products through distinct marketing strategies, brand names,
and different quality levels .This allows them to compete without directly affecting
each other’s operations.
● Pricing Strategy
Firms act as price makers and set prices for their goods and services. They can raise or
lower prices without inciting a price war.
● Non-Price Competition
Firms often compete on factors other than price, such as product quality, customer
service, and marketing strategies

26. PERFORMANCE
Short-Term Profits: In the short run, firms can make economic profits. However, these
profits attract new entries, leading to increased competition, lower prices, and higher
output.
Long-Term Profits: In the long run, the increased competition eliminates economic
profit and can lead to economic losses. However, the freedom to exit due to continued
economic losses leads to an increase in prices and profits, eliminating economic losses.
Inefficiency: Monopolistically competitive markets are productively and allocatively
inefficient. They operate with excess capacity and the price of a good is always higher
than its marginal cost.
Innovation and Variety: Monopolistic competition thrives on innovation and variety.
Firms must continuously invest in product development and advertising, and increase
the variety of their products to appeal to their target markets

27. The End!