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Key Area 2: Microecononics

Markets in Practice
Four Market Structures

Market Structure # of Control over Types of goods Barriers to


sellers price entry

Perfect competition

Monopolistic
competition

Oligopoly

Monopoly
Four Market Structures

Market Structure # of Control over Types of goods Barriers to


sellers price entry

Perfect competition Many None Identical Low


small
firms

Monopolistic Many Some Differentiated Low


competition firms

Oligopoly Few A lot Identical/different High

Monopoly One Total Unique High


Competition spectrum

Perfect competition Oligopoly

Monopolistic Monopoly
More competition Less
competitive competitive
Perfect Competition

Many buyers and sellers


(if there are too few buyers, the
buyers have too much power)

No influence on price (price takers)

The market completes this


Perfect Competition

Homogenous (identical) product

We’ve talked about substitutes, how close are these?

Perfect
substitutes
Perfect Competition

Perfect knowledge

• Prices

• Methods/technologies
Perfect Competition

Elasticity

Is demand elastic or inelastic in this model?

Demand curve (one producer)

If they raise their price from


the market, they won’t sell
D anything.

Price has been lowered by


competition to the lowest
point possible, they won’t
accept less than market
price.
Perfect Competition

Law of one price

Traffic analogy
In heavy traffic, all lanes seem to go the same speed. You leave the slower
lane to join the faster lane, which causes it to go slower. Equilibrium is
eventually reached.

In competition, you leave the high-priced seller to go to the low-priced seller,


which drives their price up. Equilibrium is eventually reached.

The assumption of perfect knowledge ensures that this happens.


Barriers to Entry

Economies of scale

Brand loyalty

Patents

Geographic

Set-up costs

Predatory pricing

Licensing

Advertising
Monopolistic Competition

Product differentiation
o Differences in the products
make them imperfect
substitutes
o Toothbrushes
o Hairdressers
o Can just be branding
o Milk

Draw a demand curve for a


monopolistically competitive firm

 
Monopolistic Competition

Other non-price competition


o After sales service
o Location
o Advertising
1. Increase demand
2. Make demand more inelastic

Barriers to entry
o Higher than perfect competition, but still low
o Specialisations
o Licenses
o Advertising
o Set-up costs
Oligopoly

Few firms dominate


o Make up 80%+ of market

Interdependence
o The decisions that an oligopolistic firm makes have huge impacts
on the others in the oligopoly.

 
Oligopoly - Interdependence

The Prisoner’s Dilemma


Jack stays silent Jack betrays

Jill stays silent Each serves 2 years Jill: 10 years


Jack: 1 year

Jill betrays Jill: 1 year Each serves 2 years


Jack: 10 years
Oligopoly - Interdependence

In an oligopoly

$7 meal $5 meal

$7 meal McDonald’s Profit: $15m McDonald’s Profit: $30m

Hungry Jack’s Profit:$15m Hungry Jack’s Profit:$5m

$5 meal McDonald’s Profit: $5m McDonald’s Profit: $10m

Hungry Jack’s Profit:$30m Hungry Jack’s Profit:$10m


Oligopoly – Golden Balls
Oligopoly

Non-price competition
• Price competition can be disastrous
• Branding and advertising
• Service (advice, after-sales)
• Warranty (not happy, money back)
• Differentiation (real or perceived)
Oligopoly

High barriers to entry


Two types

Pure
• Homogenous product
• Very little price competition

Differentiated
• Differentiated products (biscuits, soft drinks, cars)
• We know these because they advertise to tell us that
their products are different.
Oligopoly - Elasticity

Kinked demand curve


Monopoly

The firm IS the industry

Price MAKER, not a price TAKER

Unique good, no close substitutes

High barriers to entry (some monopolies exist


due to law)

Non-price competition
- they still advertise to increase
demand
Four market structures