This action might not be possible to undo. Are you sure you want to continue?
Copyright 2006 ± Biz/ed
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
Copyright 2006 ± Biz/ed
Perfect Competition Pure Monopoly
More competitive (fewer imperfections)
Copyright 2006 ± Biz/ed
Perfect Competition Pure Monopoly
Less competitive (greater degree of imperfection)
Copyright 2006 ± Biz/ed
the greater the degree of monopoly power exercised by the firm.bized. Copyright 2006 ± Biz/ed .co.uk Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale.http://www.
uk Market Structure Importance: Degree of competition affects the consumer ± will it benefit the consumer or not? Impacts on the performance and behaviour of the company/companies involved Copyright 2006 ± Biz/ed .http://www.bized.co.
bized.co.http://www.uk Market Structure Models ± a word of warning! ± Market structure deals with a number of economic µmodels¶ ± These models are a representation of reality to help us to understand what may be happening in real life ± There are extremes to the model that are unlikely to occur in reality ± They still have value as they enable us to draw comparisons and contrasts with what is observed in reality ± Models help therefore in analysing and evaluating ± they offer a benchmark Copyright 2006 ± Biz/ed .
http://www. Copyright 2006 ± Biz/ed .uk 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.co.bized.
behaviour of the firms. You might even have to ask what the industry is?? Mercedes CLK Coupe Canon SLR Camera Bananas Copyright 2006 ± Biz/ed .uk Market Structure Characteristics: Look at these everyday products ± what type of market structure are the producers of these products operating in? Electric Guitar ± Jazz Body Vodka Remember to think about the nature of the product.http://www.bized. entry and exit.co. number and size of the firms in the industry.
bized.http://www.uk Perfect Competition One extreme of the market structure spectrum Characteristics: ± Large number of firms ± Products are homogenous (identical) ± consumer has no reason to express a preference for any firm ± Freedom of entry and exit into and out of the industry ± Firms are price takers ± have no control over the price they charge for their product ± Each producer supplies a very small proportion of total industry output ± Consumers and producers have perfect knowledge about the market Copyright 2006 ± Biz/ed .co.
equilibriumreturns) then asthe output rises. MC output where the atMR and the normal its This point long to thethe falls a output The of (Q1). levelfirm is a This a because is diminishing relationship fraction of small supplier within mathematicaltotal industry rises very the position.± shapedproduces standard µU¶ additional curve. It at an cuts supply curve =profit. They will sell each extra unit for the same price. Price therefore = MR and AR P = MR = AR Q1 Output/Sales Copyright 2006 ± Biz/ed . asis first (due run alaw of lowest at whole.uk Perfect Competition Diagrammatic representation Cost/Revenue MC AC Givenaverage the cost ofis the Thethis industry price firm The MC is cost curve is the output the At The assumption of profit maximisation.http://www. supply. control over price. industry and has no between marginal and average values.co. producing theby the demand determined firm is(marginal) AC of MC industry making units of output.bized.
bized. makes Average and and MC firm The assume a firm thewould Nowlower ACMarginal costs gains that advantage nowlower could form of firm to be imply be the modification to some theexpected is for only a short timein the short run. remains or are attracted the (AR>AC) represented a new of cost advantage (saybyto the industry by grey area. price will fall and the firm will be left making normal profit once again. supply will increase.http://www. or gains some its product before others copy earning abnormal profit the idea the same.uk Perfect Competition Diagrammatic representation Cost/Revenue MC MC1 AC AC1 Because the model assumes perfect knowledge.co. What production the existence of abnormal profit. form but price. would happen? If new firms enter the industry. AC1 Abnormal profit P = MR = AR P1 = MR1 = AR1 Q1 Q2 Output/Sales Copyright 2006 ± Biz/ed . method).
uk Monopolistic or Imperfect Competition Where the conditions of perfect competition do not hold.bized.http://www. µimperfect competition¶ will exist Varying degrees of imperfection give rise to varying market structures Monopolistic competition is one of these ± not to be confused with monopoly! Copyright 2006 ± Biz/ed .co.
but not perfect.co.bized. substitutes ± Entry and exit from the industry is relatively easy ± few barriers to entry and exit ± Consumer and producer knowledge imperfect Copyright 2006 ± Biz/ed .uk Monopolistic or Imperfect Competition Characteristics: ± Large number of firms in the industry ± 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.http://www.
falls.00the sells firm willfirmdownward the each a be MR = on revenue unit for from (profit maximising output). curve.uk Monopolistic or Imperfect Competition Implications for the diagram: Cost/Revenue MC AC £1. AR>AC structure. will make AR the firm abnormal profit (the grey some way. same shape. for from sales.bized.http://www. the firm Q1 in abnormal profit. MR Q1 D (AR) Output / Sales Copyright 2006 ± Biz/ed . and the firm makes in 40p x are differentiated 60p.co.00 Abnormal Profit £0. the the monopolistic market (on average with represents sloping and the cost each unit sold However.will shadedbe able to sell extra only area). At because the products this output average) lies under the AR earned each unit being MR curve level.60 We assume that theQ1 and Marginal Cost equilibrium This is demandrunandfacing IfThe firm produces firm Since the additional the a short curve produces where willabeMC Average Cost in position forreceived£1. output by lowering price.
the AR and MR curves shift inwards as revenue from each sale is now less.bized. New entrants will increase supply causing price to fall.co. As price falls.http://www. new firms will enter encouraged by the existence of abnormal profits. MR1 Q1 MR AR1 D (AR) Output / Sales Copyright 2006 ± Biz/ed .uk Monopolistic or Imperfect Competition Implications for the diagram: Cost/Revenue MC AC Because there is relative freedom of entry and exit into the market.
At this output AR = AC and the firm will make normal profit.bized.http://www. MR1 Q2 Q1 MR AR1 D (AR) Output / Sales Copyright 2006 ± Biz/ed .uk Monopolistic or Imperfect Competition Implications for the diagram: Cost/Revenue MC AC AR = AC Notice that the existence of more substitutes makes the new AR (D) curve more price elastic.co. The firm reduces output to a point where MC = MR (Q2).
co.bized.http://www. AR = AC MR1 Q2 AR1 Output / Sales Copyright 2006 ± Biz/ed .uk Monopolistic or Imperfect Competition Implications for the diagram: Cost/Revenue MC AC This is the long run equilibrium position of a firm in monopolistic competition.
co.uk Monopolistic or Imperfect Competition Some important points about monopolistic competition: ± May reflect a wide range of markets ± Not just one point on a scale ± reflects many degrees of µimperfection¶ ± Examples? Copyright 2006 ± Biz/ed .bized.http://www.
bized.uk Monopolistic or Imperfect Competition Restaurants Plumbers/electricians/local builders Solicitors Private schools Plant hire firms Insurance brokers Health clubs Hairdressers Funeral directors Estate agents Damp proofing control firms Copyright 2006 ± Biz/ed .co.http://www.
bized.uk Monopolistic or Imperfect Competition In each case there are many firms in the industry Each can try to differentiate its product in some way Entry and exit to the industry is relatively free Consumers and producers do not have perfect knowledge of the market ± the market may indeed be relatively localised. reliability. Can you imagine trying to search out the details.http://www. etc for every plumber in the UK in the event of an emergency?? Copyright 2006 ± Biz/ed . prices. quality of service.co.
co.5. etc firms: ± A 4 firm concentration ratio of 75% means the top 4 firms account for 75% of all the sales in the industry Copyright 2006 ± Biz/ed .bized.http://www.uk Oligopoly Competition between the few ± May be a large number of firms in the industry but the industry is dominated by a small number of very large producers Concentration Ratio ± the proportion of total market sales (share) held by the top 3.4.
Market Share of the Music Industry 2002. Source IFPI: http://www. An oligopolistic market structure therefore may have many firms in the industry but it is dominated by a few large sellers.bized.http://www.html Copyright 2006 ± Biz/ed .ifpi.uk Oligopoly Example: Music sales ± The music industry has a 5-firm concentration ratio of 75%. Independents make up 25% of the market but there could be many thousands of firms that make up this µindependents¶ group.org/site-content/press/20030909.co.
bized.http://www.uk Oligopoly Features of an oligopolistic market structure: ± Price may be relatively stable across the industry ± kinked demand curve? ± Potential for collusion ± Behaviour of firms affected by what they believe their rivals might do ± interdependence of firms ± Goods could be homogenous or highly differentiated ± Branding and brand loyalty may be a potent source of competitive advantage ± Non-price competition may be prevalent ± Game theory can be used to explain some behaviour ± AC curve may be saucer shaped ± minimum efficient scale could occur over large range of output ± High barriers to entry Copyright 2006 ± Biz/ed .co.
its again fall as the firm now faces b. Oligopolistic firms may in quickly be lost and the % change rivals would not follow suit andits firm a. charging demand IfThe principle of is effectively faces Assume the firm to lower its price to of the firm seeks the kinked a price a µkinked demand on the principle rivals £5 andcompetitivean output of its to gain a curve rests curve¶ forcing it producing advantage. Any gains pricing will will follow stable or rigid it makes that: If it chose to raise price above £5. maintain asuit. buy from the cheaper rivals). the overcome this by engaging in nondemand will be smaller than the % effectively facesnot follow suit rivals will an elastic demand price competition.bized. rivals will all do the same change in demand would be greater than the % change in price and TR would fall. £5 Total Revenue B Total Revenue A Total Revenue B 100 Kinked D Curve D = Inelastic D = elastic Quantity Copyright 2006 ± Biz/ed .uk Oligopoly Price The kinked demand curve .an explanation for price stability? The firm therefore. The % a relatively inelastic demand curve. 100.http://www. its structure.co. If a firm raises its price. ± total revenue reduction in price curve for its product (consumers would would If a firm lowers its price.
bized.http://www. local duopolies may exist Copyright 2006 ± Biz/ed .co.uk Duopoly Market structure where the industry is dominated by two large producers ± Collusion may be a possible feature ± Price leadership by the larger of the two firms may exist ± the smaller firm follows the price lead of the larger one ± Highly interdependent ± High barriers to entry ± Cournot Model ± French economist ± analysed duopoly ± suggested long run equilibrium would see equal market share and normal profit made ± In reality.
therefore.bized. where one firm dominates the market Firms may be investigated for examples of monopoly power when market share exceeds 25% Use term µmonopoly power¶ with care! Copyright 2006 ± Biz/ed . rarely exists ± always some form of substitute available! Monopoly exists.uk Monopoly Pure monopoly ± where only one producer exists in the industry In reality.co.http://www.
http://www.co.bized.uk Monopoly Monopoly power ± refers to cases where firms influence the market in some way through their behaviour ± determined by the degree of concentration in the industry ± ± ± ± ± Influencing prices Influencing output Erecting barriers to entry Pricing strategies to prevent or stifle competition May not pursue profit maximisation ± encourages unwanted entrants to the market ± Sometimes seen as a case of market failure Copyright 2006 ± Biz/ed .
co. nationalisation. merger or takeover ± Through acquiring patent or license ± Through legal means ± Royal charter.uk Monopoly Origins of monopoly: ± Through growth of the firm ± Through amalgamation.bized.http://www. wholly owned plc Copyright 2006 ± Biz/ed .
price discrimination possible.http://www.inefficiency) or« could be higher due to availability of high profits Copyright 2006 ± Biz/ed .uk Monopoly Summary of characteristics of firms exercising monopoly power: ± Price ± could be deemed too high.co. ± Efficiency ± could be inefficient due to lack of competition (X.bized. may be set to destroy competition (destroyer or predatory pricing).
could be high because of the promise of high profits.uk Monopoly Innovation .bized. advertising and non-price competition Copyright 2006 ± Biz/ed .co.http://www. Possibly encourages high investment in research and development (R&D) Collusion ± possible to maintain monopoly power of key firms in industry High levels of branding.
bized.uk Monopoly Problems with models ± a reminder: ± Often difficult to distinguish between a monopoly and an oligopoly ± both may exhibit behaviour that reflects monopoly power ± Monopolies and oligopolies do not necessarily aim for traditional assumption of profit maximisation ± Degree of contestability of the market may influence behaviour ± Monopolies not always µbad¶ ± may be desirable in some cases but may need strong regulation ± Monopolies do not have to be big ± could exist locally Copyright 2006 ± Biz/ed .http://www.co.
Output assumed the exploit abnormal profits in to for a monopoly be at profit entry to the long run as maximising output (note caution here ± market is restricted. likelyrunbe relativelyposition the monopolist will be able to long to equilibrium price inelastic. not all monopolists may aim for profit maximisation!) MR Q1 AR Output / Sales Copyright 2006 ± Biz/ed .00 AC This is curve for a monopolist Given both the short run and AR (D)the barriers to entry.00 Monopoly Profit £3.co.uk Monopoly Costs / Revenue MC £7.bized.http://www.
price will be surplusat Q2. at Q1. MC £7 AC Loss of consumer surplus £3 MR Q2 Q1 AR Output / Sales Copyright 2006 ± Biz/ed . output is reduced. On the face of it. indicated by lower levels equal to the MC of production. consumers We higher prices and less facecan look therefore at a comparison of the differences choice in monopoly conditions between price and competitive compared to more output in a competitive situation compared environments. the grey shaded area.bized. to a monopoly.co.http://www.uk Monopoly Costs / Revenue Welfare implications of monopolies A look back a the diagram for The higher in at competitive be The price priceprice lower monopoly and would perfectunit with output levels output means that £3will reveal £7 per competition with market would be consumer that in equilibrium.
triangle rectangle.co.bized..http://www. MC £7 AC Gain in producer surplus £3 MR Q2 Q1 AR Output / Sales Copyright 2006 ± Biz/ed .uk Monopoly Costs / Revenue Welfare implications of monopolies The monopolist will be benefit from additional producer affected by a loss of producer surplus shownto the grey equal by the grey shaded but««.
bized.http://www.co.uk Monopoly Costs / Revenue Welfare implications of monopolies The value of the grey shaded triangle represents the total welfare loss to society ± sometimes referred to as the µdeadweight welfare loss¶. MC £7 AC £3 MR Q2 Q1 AR Output / Sales Copyright 2006 ± Biz/ed .
uk Contestable Markets Theory developed by William J.co. John Panzar and Robert Willig (1982) Helped to fill important gaps in market structure theory Perfectly contestable market ± the pure form ± not common in reality but a benchmark to explain firms¶ behaviours Copyright 2006 ± Biz/ed .http://www. Baumol.bized.
bized.co.http://www.uk Contestable Markets Key characteristics: ± Firms¶ behaviour influenced by the threat of new entrants to the industry ± No barriers to entry or exit ± No sunk costs ± Firms may deliberately limit profits made to discourage new entrants ± entry limit pricing ± Firms may attempt to erect artificial barriers to entry ± e.g« Copyright 2006 ± Biz/ed .
http://www.co.uk Contestable Markets Over capacity ± provides the opportunity to flood the market and drive down price in the event of a threat of entry Aggressive marketing and branding strategies to µtighten¶ up the market Potential for predatory or destroyer pricing Find ways of reducing costs and increasing efficiency to gain competitive advantage Copyright 2006 ± Biz/ed .bized.
take the profit and get out quickly (possible because of the freedom of entry and exit) Cream-skimming ± identifying parts of the market that are high in value added and exploiting those markets Copyright 2006 ± Biz/ed .http://www.bized.uk Contestable Markets µHit and Run¶ tactics ± enter the industry.co.
software.co.bized.uk Contestable Markets Examples of markets exhibiting contestability characteristics: ± Financial services ± Airlines ± especially flights on domestic routes ± Computer industry ± ISPs. web development ± Energy supplies ± The postal service? Copyright 2006 ± Biz/ed .http://www.
co. this allows us to draw comparisons and contrasts.http://www. Regulation ± or the threat of regulation may well affect the way a firm behaves.uk Market Structures Final reminders: Models can be used as a comparison ± they are not necessarily meant to BE reality! When looking at real world examples. Remember that these models are based on certain assumptions ± in the real world some of these assumptions may not be valid. The way that governments deal with firms may be based on a general assumption that more competition is better than less! Copyright 2006 ± Biz/ed .bized. focus on the behaviour of the firm in relation to what the model predicts would happen ± that gives the basis for analysis and evaluation of the real world situation.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.