ACCTG 1102 – MANAGERIAL ECONOMICS

MARKET STRUCTURE AND MANAGERIAL DECISION MAKING

The structure of the market in which the firm operates can limit the ability of a manager to raise
the price of the firm’s product.
Price-taker – a firm that cannot set the price of the product it sells, since price is
determined strictly by the market forces of demand and supply.
Ex. A firm makes up a relatively small portion of total sales of the industry and produces
a product that is identical to the output of the rest of the firms in the industry.
Price-setting firm – a firm that can raise its price without losing all of its sales.
Ex. The product of the firm is differentiated from rivals’ products.
The geographic market area in which the product is sold has only one, or just a few
sellers of the product.

Market power – the firm’s ability to raise price without losing all sales.

A market is any arrangement through which buyers and sellers exchange final goods or services,
resources used for production, or anything of value. The costs of making a transaction happen,
which are additional costs of doing business over and above the price paid are known as
transaction costs. Buyers and sellers use markets to facilitate exchange because markets lower
the transaction costs for both parties.

Market structure is a set of market characteristics that determines the economic environment in
which a firm operates.

Economic Characteristics to describe a Market:

 The number and size of the firms operating in the market. If there are a large number of
sellers with each producing a small portion of the total sales, no single firm can influence
market price by changing its production level. When the total output of a market is
produced by one or few firms with large market shares, a single firm can cause the price
to rise by restricting its output and to fall by increasing its output.

 The degree of product differentiation among competing producers. By differentiating a

product either through real differences in product design or through advertised image, a
firm may be able to raise its price above its rivals’ prices if consumers find the product
differences sufficiently desirable to pay the higher price.

 The likelihood of new firms entering a market when incumbent firms are earning
economic profits. Once firms enter a market, price will be bid down sufficiently to
eliminate any economic profit. Firms cannot keep prices higher than the opportunity costs
for long periods when entry is relatively easy.
MARKET STRUCTURES

In perfect competition, a large number of relatively small firms sell an undifferentiated product
in a market with no barriers to entry of new firms.

In monopolistic competition, a large number of firms that are small relative to the total size of the
market produce differentiated products without the protection of barriers to entry.

In a monopoly market, a single firm, protected by some kind of barrier to entry, produces a
product for which no close substitute are available.

In an oligopoly market, just a few firms produce most or all of the market output, so any one
firm’s pricing policy will have a significant effect on the sale of other firms in the market.

PERFECT MONOPOLISTIC
MONOPOLY OLIGOPOLY
COMPETITION COMPETITION
Number of Very Many Many/Several One Few Dominant
Firms Firms
Freedom of Unrestricted Unrestricted Restricted or Restricted
Entry Blocked
Nature of Homogenous Differentiated Unique Undifferentiated
Product (Undifferentiated) or Differentiated
Average Size Small Small Very Large Large
of Firms
Control Over None Some Total Significant
Price
Government Minimal Minimal Highly to Moderate to
Intervention Nationalization Highly
Example Fruit stand Restaurant, Hair Public Utility Auto Industry,
Salon Airlines

Globalization of Markets

It refers to the increasing economic integration of markets located in nations throughout

the world. Market integration takes place when goods and services flow freely across national
borders. Most economists believe that freer flow of resources and products can raise standards of
living in rich and poor nations alike. Globalization of markets provides managers with an
opportunity to sell more goods and services to foreign buyers and to find new and cheaper
sources of labor, capital, and raw material inputs in other countries, but along with these benefits
comes the threat of intensified competition by foreign businesses.

Reference:
Thomas, Christopher R. and Maurice, Charles (2016). Managerial Economics: Foundations of
Business Analysis and Strategy (12th ed). New York, NY: McGraw-Hill Education