The document discusses different market structures and their corresponding market power, detailing concepts like perfect competition, monopolistic competition, oligopoly, and monopoly. It evaluates factors that influence market dynamics such as the number of firms, product differentiation, barriers to entry, and non-price competition. The text concludes by comparing characteristics of these market structures in terms of pricing power, elasticity of demand, and efficiency.

1. MARKET STRUCTURE AND
MARKET POWER
Prabesh Ghimire
Health Care Market

2. Market concepts
Situation where buyers and sellers interact
• To trade goods and/or services
• Directly or through intermediaries
Situation where forces on demand and supply
interact to determine the price of goods and
services being exchanged
Mechanism for
• Determining the prices and quantities of goods
• Communicating information about prices
• Distribution of goods and services
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3. Market structure
Organizational and other characteristics of a
market
Identifies how a market is made up of
Determines the nature of competition in the
market
Spectrum: Powerless>>Powerful
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4. Determinants of Market Structure
The number and size of firms in the market
Nature of products/services provided
The extent of barriers to entry and exit
The degree of information available to both
buyers and sellers regarding price and product
characteristics
Market power: The degree to which the firms can
influence price
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5. Market Structure
5
Perfect
competition
Pure
Monopoly
More competitive (fewer imperfections)
Less competitive (greater degree of imperfection)
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6. Market Structure
6
Perfect
competition
Pure
Monopoly
More competitive (fewer imperfections)
Less competitive (greater degree of imperfection)
MonopolyDuopolyOligopolyMonopolistic
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7. Market Power
Ability of a firm (group of firms) to raise an/or maintain
market price above the level that would prevail under
competition.
Manipulate price to control profit margin
Ability to increase obstacles to potential new entrants into
the market
Firms with market power can raise prices without losing
customers to the competitors
Firms>>>Market power>>>>Price makers
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8. Market Power
Influenced by market structure
• Nature of competition/ number of firms
• Non-price factors: advertisements, loyalty schemes,
trust, product quality
Firms have ability to engage in anti-competitive
behaviours
• Predatory pricing/ undercutting
• Product tying
• Price fixing/ collusion
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9. Market Structure and Market Power
9
Perfect
competition
Pure
Monopoly
Market Power
MonopolyDuopolyOligopolyMonopolistic
Low
High
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10. Perfect market
Theoretical (ideal) market structure
 Benchmark to which real-life market structures
can be compared
Also called competitive market
Examples
• Agricultural markets: e.g. dairy market (nearly perfect)
• Mining products: iron, coal, etc.
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11. Characteristics of Perfect Market
Many producers and consumers
Homogenous products:
• Products are perfect substitutes
• Consumers are unable to differentiate between
products sold by different sellers/firms
No market power
• Cannot influence market price
• If a firm raise its price, consumers would buy from a
competitor with a lower price instead.
• Firms are price takers
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12. Characteristics of Perfect Market
 No barriers to entry and exit
 Knowledge (Information) of product:
• Perfect information about price and product
characteristics
 No externalities
• The costs and benefits are fully reflected by the market
price of goods and services
Absence of selling and transportation cost
No intervention from outside is required
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13. Monopolistic Market
 Situation in which many firms with slightly
different products compete.
Production costs are above what may achieve by
perfectly competitive firms
Examples
• Restaurants
• Hairdressers
• Clothing: Designer clothes, boutique
• TV channels
• Noodles, Toothpaste, Shampoo………
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14. Characteristics of Monopolistic Market
Many producers and many consumers
Heterogeneous products:
• Goods/service perform same basic functions
• Difference in type, style, quality, reputation, appearance,
etc.
Involves a great deal of non-price competition
based on product differentiation
• Leads to heavy marketing
No barriers to entry and exit
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15. Characteristics of Monopolistic Market
Imperfect information
• Buyers do not have complete market information
• Which product is better?
• What is a fair price of the product?
Market power: Firms have some degree of
market power
• Can raise product prices without losing all its customers
• Can lower prices without triggering a potentially ruinous
price war with competitors
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16. Characteristics of Monopolistic Market
Profit
• Results in normal profits in the long term.
 Independence
• Firms independently sets the terms of exchange for its
product
• No consideration on what effect its decisions may have
on competitors
• Firm’s action will have a negligible effect on overall
market conditions
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17. Oligopoly
Market dominated by small number of large
sellers (oligopolists)
Characterized by interdependence of firms
• Decision of one firm influenced by the decision of other firms.
Can result from various forms of collusion
• Reduce competition and lead to higher prices for consumers
Examples:
• Private clinics in small town
• Internet service providers: World link, Vianet, Broadlink, Websurfer
• Telephone services: NTC, Ncell, Smart Cell, Hello Nepal
• Soft drink industry: Pepsi, Coca-cola
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18. Characteristics of Oligopoly Market
Few number of producers/ sellers
• Few large sellers and can collude
Barriers to entry are high
• Government license, high investment, patents, access
to expensive and complex technology, consumer loyalty
High market power
• Ability to set price
• Price setters rather than price takers
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19. Characteristics of Oligopoly Market
Product differentiation
Product may be homogenous (steel) or differentiated (automobiles)
 Interdependence
• Most distinctive feature
• Each firm is so large that its action affect market
conditions
• Decision of one firm affects the decision of others
• Price rigidity
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20. Characteristics of Oligopoly Market
Consumer knowledge
• Consumers have imperfect knowledge as to price, cost
and product quality.
Profit
• Firms can retain long run abnormal profits
• Barriers to entry prevents sideline firms from entering
market to excess profits
Non-price competition
• Firms compete on terms other than price
• Advertisement, loyalty schemes, product differentiation
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21. Monopoly
Market structure where a specific person or
enterprise/firm is the only supplier of particular good/
service
Characterized by lack of competition to produce/sell good
or service, lack of substitutes and high price.
Examples
• Nepal Oil Corporation
• Salt trading Corporation
• Electricity
• Pharmaceutical industry with specific patent
• Single hospital in remote area
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22. Characteristics of monopoly
Single producer/seller/supplier
• Single firm/person has complete control on the output of
the good or service.
Unique product
• There are no close substitutes for the product in the
market
• Example: Petroleum
Barriers to entry
• No entry to new firms
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23. Characteristics of monopoly
Profit
• Maximizes profit
• Firms can charge higher prices and earn abnormal
profit in the long run
Price discrimination
• Firms may charge different prices on the same product for different
consumers
Market power
• Market power is high
• Firms are price maker
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24. Comparison of Market Structure
Perfect Monopolistic Monopoly
Number of
firms
Infinite/ Many Many One
Market power None Low High
Elasticity of
demand
Perfectly
elastic
Highly elastic Relatively
inelastic
Product
differentiation
None High Absolute/
Unique
product
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25. Comparison of Market Structure
Perfect Monopolistic Monopoly
Pricing power Price taker Price setter Price setter
Barriers to
entry/exit
None Few High
Non-price
competition
None Exists High
Efficiency Yes No No
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