GOALS

Understand the four market structures

1. Perfectly competitive market
2. Monopoly
3. Oligopoly
4. Monopolistic Competition
Be aware of the pricing and output
decisions of firms operating in each
structure
MARKET STRUCTURE
BUSINESS ENVIRONMENT in which
the firm operates, the
characteristics of which influence
the PRICING and OUTPUT decisions
of the firm.
Market Structure
Characteristics of each model:
Number and size of firms that make up
the industry
Control over price or output
Freedom of entry and exit from the industry
Nature of the product degree of homogeneity (similarity)
of the products in the industry (extent to which products
can be regarded as substitutes for each other)
Diagrammatic representation the shape
of the demand curve, etc.
Market Structure
Market structure identifies how a market
is made up in terms of:
The number of firms in the industry
The nature of the product produced
The degree of monopoly power each firm has
The degree to which the firm can influence price
Profit levels
Firms behaviour pricing strategies, non-price competition, output
levels
The extent of barriers to entry
The impact on efficiency
Market Structure
Characteristics: Look at these everyday products what
type of market structure are the producers of these
products operating in?
Remember to
think about the
nature of the
product, entry
and exit,
behaviour of the
firms, number
and size of the
firms in the
industry.
You might even
have to ask
what the
industry is??
Canon SLR Camera
Bananas
Mercedes CLK Coupe
Vodka
Electric
Guitar
Jazz Body
Is a group of
buyers and sellers
of particular good
or service.
What is a Market?
A market is any one of a variety of different
systems, institutions, procedures, social
relations and infrastructures whereby persons
trade, and goods and services are exchanged,
forming part of the economy. It is an
arrangement that allows buyers and sellers to
exchange things.
In mainstream economics, the concept of a market is
any structure that allows buyers and sellers to
exchange any type of goods, services and
information.
The exchange of goods or services for money is a
transaction. Market participants consist of all the
buyers and sellers of a good who influence its price.
There are two roles in markets, buyers and sellers.
The market facilitates trade and enables the
distribution and allocation of resources in a society.
4 Major Market Structures:
Monopoly
Oligopoly
Monopolistic Competition
Pure or Perfect Competition
PERFECT VS IMPERFECT MARKETS
1. Perfectly
Competitive
Market
1. Monopoly
2. Oligopoly
3. Monopolistic
Competition
PERFECT
COMPETITION
IMPERFECT
COMPETITION
LINE OF COMPETITION
Zero
Competition
More
competition
Monopoly
Oligopoly
Monopolistically
competitive
Market
Perfect
Competitive
Market
KINDS
OF
COMPETITION
Competition
Is a process of seeking or struggling for a
common thing or position.
Example: Mcdo vs. Jollibee, Coke vs. Pepsi,
etc.
There are two kinds of Competition: Healthy
and Unhealthy.
It will be determined by the process, tactics or
strategies used in achieving the goal or
objective.
Competition in Business
Advantages
- It leads to the improvement of the product
for sale.
- Competition keeps price low.
- The presence of other firms may lead to an
introduction of new products and services.
Unhealthy Competition
When positive, legal and clean procedures, ways or
strategies are used in attaining a goal where this would
lead to the total development of all the aspects of an
individual.
Healthy Competition
Using dirty tactics, illegal means and negative
processes are used to win like corrupting other people,
resorting to violence, etc.
This can lead to destruction and mayhem.
Perfect Competition
This is an ideal market structure because it
possesses the many conditions or assumptions that
should be seen in a perfect competitive market like
the following:
- Many buyers and sellers
- Selling of similar/ homogeneous products
- Full knowledge among buyers and sellers
about the market conditions
- Mobility among the factors of production
- Freedom for the producers to enter or leave the
country
Imperfect Competition
It is easier to find pure competition that perfect
competition in our economy because it is very hard
to follow all the conditions that have been
explained above. But if we are not too strict in
applying the conditions, we may find pure
competition in rice industry.
If the conditions are not followed our economy
could be considered as IMPERFECT COMPETITIVE.
Its is divided in three parts: monopoly, oligopoly
and monopolistic competition
MONOPOLY
The Absence of Competition
This is the production of a certain or service like no
other and without any product competing against
it.
There is no competitions so the producer may
dictate the prices but maybe controlled by the govt.
and set up large factories/plants.
No product can compete with their product or
service since there is no close substitute.
MONOPOLISTIC COMPETITION
1. There are many buyers and sellers
2. Each firm produces and sells a slightly
differentiated product
3. There is easy entry and exit
Oligopoly
Competition Among the Few
Few join this competition
They can connive and conspire so that they
can dictate the price and control the market
so that they can raise the profits in industry.
Oligopolists can produce identical or
differentiated products.
Monopolistic Competition
Includes many sellers and buyers but he
products being sold and bought are similar.
Differentiated products are products that
differ somewhat in real qualities brought
about by fashion, color, style, brand names,
patents and others.
FEATURES
DESCRIPTIONS
ATTRIBUTES
TRAITS
MANY BUYERS & SELLERS
Many
buyers
Many
sellers
HOMOGENEOUS GOOD
FARMERS PRODUCE SIMILAR
APPLES, LEMONS AND BEEF
MEATS
SELLERS & BUYERS ARE
WELL INFORMED
ABOUT PRICESSOURCES OF
SUPPLY & QUALITY
EASE OF ENTRY & EXIT OF FIRMS
NEW BUSINESS CAN BE SET UP AT
ANYTIME no barrier or hindrance to
enter into the industry as long as one has the
ability and the capacity.
At the same time, NO LOVE LOST FOR
BUSINESS WHICH DECIDES TO EXIT
OR LEAVE
SO
If there are many sellers & there are many
buyersthere is competition among sellers &
no one seller or buyer can influence the price
of the good
The COMPETITIVE firms are PRICE TAKERS
Output
Total
Revenue
Total
Cost
PROFIT
0
1
2
3
4
5
6
7
8
0
6
12
18
24
30
36
42
48
3
5
8
12
17
23
30
38
47
- 3
1
4
6
7
7
6
4
1
Marginal
Revenue
Marginal
Cost
-
6
6
6
6
6
6
6
6
-
2
3
4
5
6
7
8
9
PRICE = 6 (Dictated by the market & OUTPUT = 5
PROFIT MAXIMIZING OUTPUT = 5 GIVEN THE
MARKET DICTATED PRICE OF 6!
Using graphS
MC
MR
ROFIT
IS MAX
5
QUANTITY
REVENUE,
COST
PRICE
MR = PRICE
6
SHOULD YOU OPEN FOR
LUNCH OR
SHOULD YOU OPEN FOR
DINNER ONLY???
LUNCHTO OPEN OR NOT
HAVE YOU WALKED INTO A
RESTAURANT FOR LUNCH AND FOUND
IT ALMOST EMPTY?
WHAT WOULD HELP YOU DECIDE?
LUNCHTO OPEN OR NOT
Keep in mind the
distinction between
fixed ( rent, kitchen
equipment, tables,
etc) and variable
costs (food & wages)
Variable costs
matter/are relevant
rather than the fixed
costs
LUNCHTO OPEN OR NOT
IF THE REVENUE
FROM FEW
LUNCHTIME
CUSTOMERS ARE
ENOUGH TO
COVER THE
VARIABLE COST
THEN IT SHOULD
OPEN
Dealing with losses
TR > TVC, then the firm should keep producing
TR < TVC, then the firm should shut down
(temporarily closed)
TR = TVC, the firm should be indifferent
between shutting down and producing
ONE SELLER
UNIQUE PRODUCT
MERALCO =
ELECTRICITY
UNIQUE PRODUCT
MAYNILAD =
WATER
Economies of scale
INTEL can produce
CENTRAL MICRO-
PROCESSORS at the
lowest unit cost
Exclusive ownership of a resource
DE BEERS controls
The market for
DIAMOND
Legal barriers = patents & licenses
Pharmaceutical
Companies are
Given patents to
Produce drugs
IBM, KODAK,
XEROX, POLAROID
GE, DU PONT
ONE SELLER HAS THE
MARKET POWER TO
INFLUENCE THE PRICE
Using graphSPRICE & OUTPUT DECISIONS OF
A MONOPOLIST
MC
MR
PROFIT
IS MAX
Q* QUANTITY
REVENUE,
COST
PRICE
MONOPOLY
PRICE
P*
D
MONOPOLY
1. There is only one seller
2. The single seller sells a product for which
there are no close substitutes
3. There are extremely high barriers to entry
Legal barriers
Economies of scale (low unit cost)
Exclusive ownership of necessary resource
FEW LARGE SELLERS
SELL HOMOGENEOUS OR
DIFFERENTIATED GOOD
CONTROL OVER PRICE BUT
MUTUAL INTERDEPENDENCE
Few oligopolistic firms are price
maker
Consider how its rival will react to
any change in price, output, quality
or advertising
Characterized by strategic behavior
(self-interest) and mutual
interdependence (compete or
collude)
LEGAL BARRIERS TO ENTRY
OLIGOPOLY
1. There are few sellers and many buyers
2. Firms produce and sell either homogeneous
or differentiated products
3. Some control over the price but mutual
interdependence
4. There are significant barriers to entry such as
patent rights, legal barriers etc
It is the combination of monopoly and competitive
markets but monopolistically competitive industries
Are more competitive than monopolistic.
RELATIVELY LARGE NUMBER OF
SELLERS AND BUYERS
Small market shares
No collusion (agreement, conspiracy
among the firms)
Independent actions about price &
quantity
SELLS DIFFERENTIATED PRODUCTS
(Real or imagined)
Product attributes
Service
Location
Brand names & packaging
Some control over price
PROMOTED BY HEAVY
ADVERTISING
DIFFERENTin terms of product
attributes
Product attributes functions,
materials, design & workmanship
How different are the two?
Hp desktop
Mac desktop
Storage capacity, speed,
Graphic displays, included
Software & compatibility
BAGSANYONE??
PRADA VS. VUITTON
I CAN SERVE U BETTER!
THE NEARNESS OF YOU
SUPERMARKET VS. TINDAHAN NI
ALING NENA
BRAND NAMES & PACKAGING
BECAUSE THEY ARE DIFFERENT
Monopolistically competitive firms have
some control over price
Consumers buy product which they prefer
and can afford
But control over price is limited because of
many substitutes
EASY ENTRY AND EXIT
Because competitors are small firms,
Economies of scale are few and
Capital requirements are low.
WHY advertise???
The goal of product
Differentiation and advertising is
NONPRICE COMPETITION.
To make price less of a factor
In consumer purchases and
Make product differences a
Greater factor
NUMBER OF FIRMS
MONOPOLY
Water
Cable
OLIGOPOLY
Fuel
Tennis Ball
MONOPOLISTIC
COMPETITION
Novels
Movies
PERFECT
COMPETITION
Agricultural
product
Milk
One
firm
Few
firms
Many firms
Identical
Product
Differentiated
Product
Type of Product
The Market Structures
CharacterIstIcs MonopoIy OIIgopoIy
MonopoIIstIc
CompetItIon
Perfect/Pure
CompetItI
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