Michael Loh

MARKET STRUCTURE

Market Structure
Characteristics
1. Number of sellers
a. The number of sellers determines the firms influence over
setting market price and output.
2. Many sellers
a. Each firms produces significantly share of total market output
limited or no influence over market prices and output price
takers.
3. Few sellers
a. Each firm produces significant share of total market output
considerable influence over market price and output price
setter.
4. Nature of Products
a. Homogeneous products are identical with perfect substitutes for
each other whereby firms do not undertake advertising or
branding.
b. Homogeneous products are similar but not identical with
imperfect substitutes for each other. Consumers may have brand
loyalty whereby firms undertake advertising to maintain brand
loyalty.
5. Barriers to entry or exit
a. There are no barriers to entry or exit so firms may enter or exit
the industry anytime. If existing firs are earning supernormal
profits, new firms will enter, increase supply and lower prices,
earning normal profits in the long run.
b. With significant barriers to entry or exit, firms can earn
supernormal profits in the long run.
6. Knowledge of buyers and sellers
a. Perfect information on prices and quality of products readily
available to consumers and information on production process
and technology readily available to buyers exist in perfect
markets i.e. perfectly competitive market structure.
b. Imperfect knowledge results in consumers and buyers lacking
information.

Perfect
Competition
Monopoly

Number of
Sellers

Nature of
Product

Barriers to
Entry/Exit

Many

Homogeneou
s
Unique (No

No

Knowledge of
Buyers and
Sellers
Perfect

High

Imperfect

One

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Michael Loh

MARKET STRUCTURE

Monopolistic
Competition
Oligopoly

Many
Few

Substitutes)
Differentiate
d
Homogeneou
s/
Differentiate
d

Low

Imperfect

Moderate

Imperfect

Economic Profit
Types
1. Subnormal : TR < TC | AR < AC making loss
2. Normal: TR = TC | AR = AC revenue covers costs
3. Supernormal: TC > TC | AR > AC Earning profits

Shutdown conditions in the short run

Whether the firm decides to stop or continue production depends if the firms
total revenue can cover its total variable cost.
Subnormal profits
1. TR > TVC / AR > AVC can cover variable cost loss is less when
production is continued so continue production.
2. TR = TVC / AR = AVC loss is the same whether or not production is
stopped or continued hence more likely to continue production.
3. TC<TVC / AR<AVC cannot cover variable cost loss is less when
production is stopped so stop production.

Perfect Competition
Structure
1. Characteristics
a. Number of sellers many sellers
b. Nature of product homogeneous
c. Barriers to entry of exit no barriers to entry or exit
d. Knowledge of buyers and sellers perfect
2. Price elasticity of demand
a. An individual firms demand curve is perfectly price elastic
horizontal demand curve homogeneous product + perfect
knowledge n market power price taker.
3. Price elasticity of demand
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MARKET STRUCTURE

a. An individual firms demand curve is perfectly price elastic

horizontal demand curve homogeneous product + perfect
knowledge no market power price taker
b. The market demand is price elastic leading to downward sloping
demand curve, thus lowering the price leads to a more than
proportionate increase in the quantity demanded of the good.

Conduct
1. Profit Maximisation
a. With the total approach, TR-TC is maximum
b. With the Marginalist approach, produce at MR = rising MC.
2. Pricing policy
a. None price taker follow market price
3. Non-pricing strategy
a. None homogeneous product (perfect substitutes) + perfect
knowledge no incentive to advertise

Performance
1. Profits
a. Long-run normal profits, as there is no barrier to entry or exit.
Firms may enter or exit the industry anytime. If existing firms are
earning supernormal profits, new firms will enter, increase supply
and lower prices, so earning normal profits in the long run.
2. Efficiency
a. Allocative efficiency is achieved when P=MC so maximising
consumer and producer welfare.
b. Productive efficiency is achieved when firms are producing on
LRAC. All firms have incentives to produce on LRAC but level of
incentive varies. PC is more likely to achieve competition
charging prices consistent with costs. Otherwise, consumers shift
to rival firms (perfect substitutes). Hence, PC firms produce at
the lowest average cost of production so as in reality, achieving
the most productive efficiency.
c. Dynamic efficiency is not achieved with perfect knowledge but
no incentive to innovate.
3. Equity
a. Firms promote equity with no barriers to entry or exit making
normal profits in the long run.
4. Consumer choice
a. There is one choice with a homogeneous product.

Monopoly
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Michael Loh

MARKET STRUCTURE

Structure
1. Characteristics
a. Number of sellers sole seller price setter
b. Nature of product Unique no substitute
c. Barriers to entry or exit high due to natural or manmade
barriers to entry maintain monopoly position
d. Knowledge of buyers and sellers imperfect knowledge.

Conduct
1. Profit maximisation
a. The total approach, TR-TC, is maximum.
b. The Marginalist approach, produce at MR = rising MC.
2. Pricing policy
a. P>MC profit maximising objective the demand for product
more price inelastic, the greater the market power and greater
the price is set above MC.
3. Non-pricing Strategy
a. Raise barriers to entry to earn supernormal profit. It the market is
open to competition, to prevent new entrant, raise barriers to
entry (e.g. conduct large-scale research and development to
product differentiation.)

Performance
1. Profits
a. Long run -> Normal/Supernormal high barriers to entry ease
of entry or exit decrease firms cannot simply enter when
attracted by supernormal profit or exit when there is subnormal
profit.
2. Efficiency
a. Allocative efficiency is not achieved as P>MC. The greater the
market power, the lesser is the allocative efficiency.
b. Productive efficiency is achieved when firms are producing on the
LRAC. All firms have incentive to produce on LRAC but the level
of incentive varies. The monopoly is least likely to achieve
productive efficiency as it faces no competition. Lack of
competition leads to complacency. In reality, monopolies are
productive inefficient.
c. Dynamic efficiency is achieved if the market is open to
competition. Raise barriers of entry to prevent entrant with the
need to innovate.

Barriers to entry
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Michael Loh

MARKET STRUCTURE

It refers to any man-made or natural impediments that prevent the entry of

new firms into the industry and thereby limit the amount of competition
faced by existing firms.
1. Natural
a. Economies of scale high fixed cost MES achieved a high
output MES achieved at high output more than one firm
each firm produces smaller output not efficient for more than
one firm natural monopoly e.g. Singapore Power.
b. Control over essential resources: Monopoly has ownership or
control of essential raw materials and thus is able to prevent
other firms from entering industry e.g. De Beer prior to mid1990s (diamond).
2. Artificial
a. Control over outlets: Monopoly controls outlets where products
are sold to prevent other firms from entering the industry.
b. Legal barriers: The firms is protected by government licencing
and legislations e.g. Patents, copyrights.
c. Branding is established through advertising/ product
differentiation difficult for the potential entrant to
compete with established brands/firms.
d. Predatory pricing: It is selling below cost to prevent other firms
from entering the industry so the potential entrant cannot match
up with the price.
e. Cartel is the agreement between firms in the industry to keep the
potential entrant from entering the industry e.g. Organisation of
Petroleum Export Countries (OPEC).

Price discrimination
The practice of charging different prices for the same product or different
units of it and the difference in prices is not due to cost difference.
1. Conditions
a. Monopoly power: Consumers charged with discriminatory prices
cannot turn to cheaper alternatives/substitutes.
b. Segregated market: The market must be segregated into
separate and identifiable groups to prevent seepage between
markets to markets so that consumers cannot buy products in
lower-priced markets and then sell in higher-priced markets.
c. Different price elasticity of demand: Different consumers have
different price elasticity of demand.
2. Types
a. First degree/ perfect price discrimination: The monopolist sells at
a maximum price to consumers who are willing to pay, resulting I
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MARKET STRUCTURE

the loss of total consumer welfare, e.g. auction sites P=MC

allocative efficiency.
b. Second degree/ block pricing: The monopolist sells at uniform
price for a specific quantity of the product and lower price for
subsequent units e.g. telephone charges result in the loss of
consumer welfare.
c. Third degree: The monopolist sells at different prices for the
same product in different markets. The markets have different
price elasticity of demand whereby the monopolist can supply to
markets that may not be able to afford the non-discriminated
price e.g. child travel concession improves equity.

Control of Monopoly
1. Measurement: The concentration ratio measures the proportion of
output in sales from the largest firms in an industry.
2. Methods
a. Anti-trust policies are set to prevent the deliberate creation of
monopolies and anti-competition behaviour.
b. Nationalisation: The government takes over ownership and
production especially for goods and services that are essential
to national interests e.g. utilities advantage: disadvantage:
lack of innovation, disregard consumer choice.
c. Regulation using MC pricing policy P=MC forces monopoly
to lower price and increase output increases consumer
surplus.
d. Regulation using AC pricing policy P=AC forces the firm to
charge the lowest possible price normal profit but still
continues production advantage: increase consumer surplus
disadvantage: allocative inefficiency since O>MC, subsidies
needed if the firm makes subnormal profit.
e. Regulation using lump-sum tax increases fixed cost and lowers
profits of monopoly without affecting price and output.
f. Regulation using specific tax: A fixed sum is taxed per unit
output increases variable cost price higher and output lower
tax burden shared between monopolist and consumers.

Monopolistic Competition
Structure
1. Characteristics
a. Number of sellers Many
b. Nature of product Differentiated
c. Barriers to entry or exit Lower
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d. Knowledge of buyers and sellers imperfect

2. Price elasticity of Demand
a. With the individual firm, the demand is price elastic downward
sloping demand curve differentiated product some market
power price setter.
b. Market cannot be determined differentiated products no
single market price only range of prices for each type of
product.

Conduct
1. Profit maximisation
a. Under the total approach, TR TC, is maximum.
b. Under the Marginalist approach, produce at MR = rising MC.
2. Pricing policy
a. P>MC profit maximising objective the demand for product
more price inelastic, the greater the market power and greater
the price is set above MC.
3. Non-pricing strategy
a. Product differentiation real differences: quality of product
imaginary differences: advertising, branding normal profit in
the long run small scale.

Performance
1. Profits
a. Long-run Normal profit.
2. Efficiency
a. Allocative efficiency is not achieved P > MC the greater the
market power, the lesser the efficiency.
b. Productive efficiency is achieved when firms are producing on
LRAC. All firms have the incentive to produce on LRAC but some
degree of competition and charge price consistent with costs.
Otherwise, consumers may shift to rival firms (some degree of
substitutability) which produce at the lowest average cost of
production for productive efficiency.
c. Dynamic efficiency is achieved for product differentiation.
3. Equity
a. Not equitable equity worsens earn super normal profit in
the long run from consumers the greater the market power,
the lesser the equity.
4. Consumer choice
a. Many choices

Oligopoly
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MARKET STRUCTURE

Structure
1. Characteristics
a. Number of sellers few dominant, many small firms
b. Nature of product Homogeneous (e.g. crude oil) /
Differentiated (e.g. grades of petrol).
c. Barriers to entry or exit high
d. Knowledge of buyers and sellers imperfect
e. Mutually interdependent: Each firm is affected by its rival
decisions and its decision affects rivals.
2. Indicator
a. The concentration ratio measures the size of the firm relative to
its industry.
3. Price elasticity of demand
a. There is price rigidity in an oligopoly market structures as shown
in the kind demand curve. When one firm decreases price, rival
firms will follow suit, but when a firm increases price, rival firms
do not follow this is because when price is lowered, demand is
price inelastic, leading to a fall in total revenue. When the price
is increased, its demand is price elastic, leading to a fall in total
revenue.

Conduct
1. Profit maximisation
a. Under the total approach, TR-TC, is maximum.
b. Under the Marginalist approach, produces at MR = rising MC.
2. Pricing Policy
a. P>MC profit maximising objective the demand for product
more price inelastic, the greater the market power and greater
the price is set above the MC.
b. Price wars happen when a firm wants to gain market share and
power. It keeps prices lower than its rivals. This often lasts for
short periods.
3. Non-pricing Strategy
a. Advertising product development normal/ supernormal profit
in the long run + high level of competition large scale.
b. Tacit collusion rival firms cooperate for benefits no formal
agreement (unlike cartels) done by following pricing policy of
market leader or firm that is skilful in analysing market condition
(the firm is also known as barometric leader).

Performance
1. Profits
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a. Long run Normal/ supernormal high barriers to entry easy

of entry or exit decrease firms cannot simply enter when
attracted by supernormal profits or exit when there is subnormal
profit.
2. Efficiency
a. Allocative efficiency is not achieved as P>MC. The greater the
market power, the lesser is the efficiency.
b. Productive efficiency is achieved when firms are producing on
LRAC. All firms have the incentive to produce on LRAC but the
level of incentive varies. Oligopoly faces little competition. Lack
of competition leads to complacency so, in reality, results in
productive inefficiency.
c. Dynamic efficiency is achieved in product differentiation.
3. Equity
a. Equity worsens because the firm earns supernormal profit in the
long run from consumers. The greater the market power the
lesser is equity.
4. Consumer choice
a. There are many choices because there is product differentiation.

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