http://www.bized.co.uk Market Structures Copyright 2005 Biz/ed http://www.bized.co.uk Market

http://www.bized.co.uk Market Structures Copyright 2005  Biz/ed http://www.bized.co.uk Market

http://www.bized.co.uk Market Structures Copyright 2005 Biz/ed http://www.bized.co.uk Market Structures Type of market structure influences how a firm behaves:

Pricing Supply Barriers to Entry Efficiency Competition Copyright 2005 Biz/ed http://www.bized.co.uk Market Structures Degree of competition in the industry High levels of competition Perfect competition Limited competition Monopoly Degrees of competition in between

Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure Determinants of market structure Freedom of entry and exit Nature of the product homogenous (identical), differentiated? Control over supply/output Control over price Barriers to entry Copyright 2005 Biz/ed http://www.bized.co.uk

Market Structure 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 Copyright 2005 Biz/ed http://www.bized.co.uk

Market Structure Examples of perfect competition: Financial markets stock exchange, currency markets, bond markets? Agriculture? To what extent? Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure Advantages of Perfect Competition: High degree of competition helps allocate resources to most efficient use Price = marginal costs

Normal profit made in the long run Firms operate at maximum efficiency Consumers benefit Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure What happens in a competitive environment? New idea? firm makes short term abnormal profit Other firms enter the industry to take advantage of abnormal profit Supply increases price falls

Long run normal profit made Choice for consumer Price sufficient for normal profit to be made but no more! Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure Imperfect or Monopolistic Competition 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

Firm has some control over price Examples restaurants, professions solicitors, etc., building firms plasterers, plumbers, etc. Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure Oligopoly Competition amongst the few

Industry dominated by small number of large firms Many firms may make up the industry High barriers to entry Products could be highly differentiated branding or homogenous Nonprice competition Price stability within the market - kinked demand curve? Potential for collusion? Abnormal profits High degree of interdependence between firms

Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure Examples of oligopolistic structures: Supermarkets Banking industry Chemicals

Oil Medicinal drugs Broadcasting Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure Measuring Oligopoly: Concentration ratio the proportion of market share accounted for by top X number of firms: E.g. 5 firm concentration ratio of 80% means top 5 five firms account for 80% of market share 3 firm CR of 72% - top 3 firms account for 72% of market share

Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure 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 Copyright 2005 Biz/ed http://www.bized.co.uk

Market Structure Monopoly: Pure monopoly industry is the firm! Actual monopoly where firm has >25% market share Natural Monopoly high fixed costs gas, electricity, water, telecommunications, rail Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure 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 Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure

Advantages and disadvantages of monopoly: Advantages: May be appropriate if natural monopoly Encourages R&D Encourages innovation Development of some products not likely without some guarantee of monopoly in production Economies of scale can be gained consumer may benefit

Copyright 2005 Biz/ed http://www.bized.co.uk Market Structure Disadvantages: Exploitation of consumer higher prices Potential for supply to be limited less choice Potential for inefficiency X-inefficiency complacency over controls on costs Copyright 2005 Biz/ed http://www.bized.co.uk

Market Structure Price Kinked Demand Curve 5 Kinked D Curve D = elastic D = Inelastic 100 Quantity Copyright 2005 Biz/ed

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