MARKET STRUCTURE

 Perfect Competition, Monopoly,

Monopolistic Competition,
Oligopoly
 Assumptions

1  Short and long run equilibrium

MARKET & MARKET STRUCTURE
 Market : Any arrangement that enables buyers
and sellers to contact for transactions.
 Market contents 2 kinds of competition :
1) Price competition
2) Non-price competition
 The relationship among sellers is called the
Marker Structure of the sellers.

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PRICE COMPETITION
 Sellercompetes among each other by
sitting a lower price.

Non-price competition
Sellers competes in area like product quality,advertising,

packaging and service other than price.

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 MARKET STRUCTURE
Perfect Pure
Competition Monopoly

More competitive (fewer imperfections)

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 Market Structure
Perfect Pure
Competition Monopoly

Less competitive (greater degree

of imperfection)

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 Market Structure
Pure
Perfect
Monopoly
Competition

Monopolistic Competition Oligopoly Duopoly Monopoly

The further right on the scale, the greater the degree

of monopoly power exercised by the firm.

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Economic analysis identifies four
types of market structure

1. PERFECT COMPETITION
2. MONOPOLY
3. OLIGOPOLY
4. MONOPOLISTIC COMPETITION
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1. PERFECT COMPETITION
 Conditions for perfect competitive market:
 Many buyers and sellers, small relative to the market.
 Products are identical or Homogenous Products.
 Free Entry or exist (No barriers to new firms entering
the market).
Perfect Knowledge of market Opportunities
 Prices are determined by the interaction of aggregate
demand and aggregate supply.
 Firms are so small that cannot affect the price in the
market.
 Ifraise prices, consumers switch to another firm.
 Price takers.
 Example: wheat farmers.

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 Firms face perfectly elastic demand.
MARKET STRUCTURE
 Examples of perfect competition:
Financial
markets – stock
exchange, currency markets,
bond markets?
Gold Market
 To what extent?

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 PERFECT COMPETITION

 Free entry and exit to industry

 Homogenous product – identical so no
consumer preference
 Large number of buyers and sellers – no
individual seller can influence price
 Sellers are price takers – have to accept
the market price
 Perfect information available to buyers and
sellers

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 1) Perfect Competition

 Homogenous Products: The goods are sold by different

sellers as exactly alike from the consumers regard.

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FREE ENTRY AND EXIT:

 Firms
are free to enter or leave the
market. They do not face restriction on
competing with other sellers.

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PERFECT INFORMATION:
 All the buyers and sellers know the aspects
of the market, including price, quality and
quantity of the good
 Market information such as new design and
latest technology are available.

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INDIVIDUAL SELLERS HAVE NO
INFLUENCE ON THE MARKET:

 In
a perfectly competitive market, there are
many buyers and sellers, since all the buyers
and sellers know the aspects of the market,
goods are homogenous, so no individual
seller can affect the market price, because his
output just takes up a little part of the whole
market output.

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2. MONOPOLY
 A monopoly is a firm that sells a good that
does not have close substitutes.
 In other words, a monopoly is a firm that can
ignore the actions of all other firms.
 Ifit can ignore them, they are not producing
close enough substitutes.
 Reasons for monopolies
 Entry Blocked by Government Action
 Patents and copyrights.
 Public franchises.

 Control of a Key Resource

 Natural Monopoly

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 MONOPOLY:

 High barriers to entry

 Firm controls price OR output/supply
 Abnormal profits in long run
 Possibility of price discrimination
 Consumer choice limited
 Prices in excess of MC

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 MONOPOLY
 Entry is completely blocked:
only 1 producer in the market and no entry in
monopoly.
 Monopolists may sell
homogeneous or heterogeneous
goods:
The goods or services sold by a monopolist
may be homogeneous.
 A monopolist may also sell heterogeneous
goods or services.
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 Information of the market is imperfect:
No perfect information in the market.
Neither the sellers nor buyers know all
aspects of the market.

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HOW ARE MONOPOLIES FORMED
 By government franchise:
When the government grants a
franchise to a firm to operate as the only
producer of a good, a franchised
monopoly is created.

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 By patent and copyright:
When a producer has invented a new product,
he can apply to the government for a patent. It
gives him the exclusive rights to use his new
product for a certain period, within this period,
nobody can use his new product without his
green light.

Copyrights give writers, composers and artists

exclusive rights over their ideas for a certain
period.
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ECONOMIES OF SCALE: NATURAL
OLIGOPOLIES

 When minimum efficient scale (MES) for a

typical firm is a relatively large percentage of
market
 only a few large firms survive since small firms
can’t compete
 Market becomes an (natural) Monopoly
 Remember, MES is defined as the lowest level of
output at which it can achieve minimum cost per
unit
 The output level at which the LRATC first hits
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 Hugecapital requirement and
economies of scale:
The firm needs to produce a huge output to
enjoy the benefits of economics of scale. After
it has fully established itself,
== it’s average cost of production is lower
than the potential competitors.
== it’s output may be very big and so it can
satisfy the entire market demand.

As a result, other firms will be discouraged or

give up from entering the market.
It called natural monopoly.

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MONOPOLISTIC COMPETITION:
HYBRID OF PERFECT COMPETITION AND MONOPOLY, SHARING
SOME OF FEATURES OF EACH

 Many buyers and sellers

 Products differentiated
 Relatively free entry and exit
 Each firm may have a tiny ‘monopoly’ because
of the differentiation of their product
 May have some element of control over price
due to the fact that they are able to
differentiate their product in some way from
their rivals – products are therefore close, but
not perfect, substitutes
 Downward-sloping demand-curves
 Consumer and producer knowledge imperfect
 Examples – restaurants, professions –
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solicitors, etc., building firms – plasterers,
plumbers, etc.
 MONOPOLISTIC COMPETITION
Features of both perfect competition and monopoly are present.

 Similar features to perfect competition

- A large no. of sellers and buyers.
For example, thousands of hair salons, boutiques in HK.

- Free entry and exit.

New firms have to compete with existing firms for business.

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 Different
features from perfect
competition
- The goods sold are heterogeneous:
The product sold by different sellers as different.
The differentiation may rise from differences in
quality, package design, advertisements, etc.

- Imperfect information of the market:

Neither the sellers nor buyers know all aspect
of the market.
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SOME BEHAVIOUR OF FIRM UNDER MONOPOLISTIC COMPETITION
 Monopolistic competition are price searchers
They need to search for the particular
price that maximizes profits.

 Non – price competition:

For example, advertising, offering gifts
and organizing lucky .

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 OLIGOPOLY –
COMPETITION AMONGST THE FEW
 Industry dominated by small number of large
firms
 High barriers to entry
 Products could be highly differentiated –
branding or homogenous
 Non–price competition
 Price stability within the market - kinked
demand curve?
 Potential for collusion?
 Abnormal profits
 Behaviour of firms affected by what they
believe their rivals
might do – interdependence of firms
 High degree of interdependence between firms 27
 DUOPOLY:

 Industry dominated by two large firms

 Possibility of price leader emerging –
rival will follow price leaders pricing
decisions
 High barriers to entry
 Abnormal profits likely

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 OLIGOPOLY
 Oligopoly – market is dominated by several sellers
 Duopoly –there are only 2 sellers
Features of an oligopoly :
 Imperfect information of the market, neither sellers nor
consumers are fully aware of the cost, price, quality and
quantity sold by different sellers.
 Several dominant sellers, in an oligopolists market a large
share of the market demand is satisfied by several major
firms.
 Sellers are interdependent, oligopolists will consider their
competitors’ responses in deciding their business.

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 Oligopolists sell heterogeneous or homogeneous
goods:
For example: The Coca Cola Company sell
Bonaqua Mineralized Water and Coca Cola Soft
Drink.
It’s products are homogeneous.

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 Entry is restricted or difficult:
- The existing firms are well-established, the
oligopolists enjoy the benefits of economies of scale,
new firm have to pay a huge cost when competing
with the existing firms.

- The existing firms have already built up their names

and gained customers’ good will. New firms need to
advertise heavily to compete with the existing firms. 31
 The government may set up rules to govern entry.
 SOME BEHAVIOUR OF FIRMS UNDER OLIGOPOLY
 Oligopolists are price searchers:
They need to search for the particular price
that maximizes profits.
 The possibility of a ‘price war’:
oligopolistic sellers are interdependent. If 1
seller lowers its price to attract more
business, other sellers will follow. A price war
will break out, and some sellers may go out of
business.

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 Price leadership:
The dominant sellers may act as an leaders in
initiating changes in price, the smaller firm
will follow.

 Non – price competition:

Sellers often engage in non-price competition
to promote their product.
For example, banks give some gifts to the
customers who take up their credit card
services.

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REVIEW SESSION 3

PERFECT MONOPOLISTIC
CHARACTERISTIC OLIGOPOLY MONOPOLY
COMPETITION COMPETITION

Number of firms Many Many Few One

Identical or
Type of product Identical Differentiated Unique
differentiated

Ease of entry High High Low Entry blocked

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SUMMARY ON FOUR TYPES OF
MARKET
Market Structure
Perfect Monopolistic
Competition Competition Oligopoly Monopoly
# of Firms Many Many Few One
Product Identical Differentiated Either No close substitute
Differentiation
Barriers to None None Big Insurmountable
Entry
Control over None Some Considerable Considerable or
Price Regulated
Concentration 0 Low High 100
Ratio
Long Run 0 0 0 0
Economic
Profit
Examples Wheat Processed Automobiles Local 35
Food, Brand Electricity, Water
Clothing