Business Environment Chapter 4

Market Structure and Business

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

. the greater the degree of monopoly power exercised by the firm.Market Structure Perfect Competition Pure Monopoly Monopolistic Competition Oligopoly Duopoly Monopoly The further right on the scale.

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 .

entry and exit. You might even have to ask what the industry is?? Vodka Mercedes CLK Coupe Electric Guitar – Jazz Body Canon SLR Camera Bananas . behaviour of the firms.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. number and size of the firms in the industry.

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 .

Monopoly • Pure monopoly – where only one producer exists in the industry • In reality. rarely exists – always some form of substitute available! • Monopoly exists. where one firm dominates the market • Firms may be investigated for examples of monopoly power when market share exceeds 25% • Use term ‘monopoly power’ with care! . therefore.

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 .

merger or takeover – Through acquiring patent or license – Through legal means – Royal charter.Monopoly • Origins of monopoly: – Through growth of the firm – Through amalgamation. nationalisation. wholly owned plc .

price discrimination possible.Monopoly • Summary of characteristics of firms exercising monopoly power: – Price – could be deemed too high. may be set to destroy competition (destroyer or predatory pricing). – Efficiency – could be inefficient due to lack of competition (X.inefficiency) or… • could be higher due to availability of high profits .

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. advertising and non-price competition .could be high because of the promise of high profits.Monopoly • Innovation .

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 ‘bad’ – may be desirable in some cases but may need strong regulation – Monopolies do not have to be big – could exist locally .

5.4. etc firms: – A 4 firm concentration ratio of 75% means the top 4 firms account for 75% of all the sales in the industry .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.

An oligopolistic market structure therefore may have many firms in the industry but it is dominated by a few large . Market Share of the Music Industry 2002.ifpi.Oligopoly • Example: • Music sales – The music industry has a 5-firm concentration ratio of 75%. Source IFPI: http://www. Independents make up 25% of the market but there could be many thousands of firms that make up this ‘independents’ group.

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 .

‘imperfect 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! .Monopolistic or Imperfect Competition • Where the conditions of perfect competition do not hold.

substitutes – Entry and exit from the industry is relatively easy – few barriers to entry and exit – Consumer and producer knowledge imperfect . but not perfect.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.

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 ‘imperfection’ – Examples? .

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 .

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. quality of service. Can you imagine trying to search out the details. prices. etc for every plumber in the UK in the event of an emergency?? . reliability.

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