MARKET STRUCTURES

Prepared by
Engr. Dr. Adedotun Adetunla
1
 What Are Markets?
A market is where buyers and sellers:
• meet to exchange goods and services.
• are affected by some level of competition.

A market is a composition of systems,

institutions, procedures, social relations or
infrastructures whereby parties engage in
exchange. While parties may exchange goods
and services by barter, most markets rely on
sellers offering their goods or services to
buyers in exchange for money

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 What Are Markets?
Markets are classified by 4 structures

1. Pure (perfect) Competition

2. Monopolistic Competition

3. Oligopoly

4. Monopoly SWS 2006 3

The 5 conditions of perfect competition
1) LARGE number of SMALL firms.
No single buyer or seller can influence the price.

2) Buyers and sellers deal in identical products. No product

differences. (EXAMPLES: Salt, Flour, Commodity, Corn)

3) Unlimited Competition: so many firms, that suppliers lose the

ability to set their own price.

4) No Barriers to Entry. Sellers are free to enter the market,

conduct business and free to leave the market. (Low cost to
enter)

5) Each firm is a PRICE-TAKER

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 Perfect Competition
 Each individual firm istoo small to influence prices.
 Price becomes fixed to everyone in the industry.

EXAMPLE: the price of a bushel of wheat is set

only by the interaction of supply and demand .
Generally speaking, wheat is the
same per bushel in North Georgia
as it is in Florida.

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 Perfect Competition
Firms in a perfectly competitive market are
price takers. (they take the price they are given, they
can’t change the price)

Since they have no control over their own

NO MARKET POWER
prices, they have _______________________.
MARKET POWER = “the ability to set one’s OWN prices”

 In other words, no one will buy an overpriced

corn/maize. Why should they?
 A 10 Naira corn is the same as the 7 Naira one,
so there is no reason to spend that extra penny.
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 Monopolistic Competition
The 5 conditions of Monopolistic Competition
1) LARGE number of large companies (but fewer than perfect
competition).
Sellers can influence the price through creating a product identity
2) Products are NOT exactly identical, BUT VERY SIMILAR,
so companies use PRODUCT DIFFERENTIATION

3) Heavy Competition: Firms must remain aware of their

competitor’s actions, but they each have some ability to
control their own prices.

4) Low Barriers to Entry: harder to get started because of the

amount of competition.
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5) Monopolistic competition takes its name and its structure

 Monopolistic Competitive Market
STUDY TIP:
The key idea to understanding monopolistic competition is that
firms sell products that are similar, but not exactly alike.

EXAMPLE: Hand Soap

 Essentially, all hand soaps are the same. Yet firms

can create a brand identity that separates their
hand soap from their competitor’s.
 This brand identity can be formed through
packaging, product support, and especially
advertising.
 If effective, consumers will positively identify a
certain brand and purchase it even if hand soap
costs more. SWS 2006 8
Conditions of Monopolistic Competition

Product Differentiation:
 The real or imagined differences
between competing products in the
same industry.
 Differences may be real or imagined.

 Differentiation may be color, packaging, store

location, store design, store decorations,
delivery, service….. anything to make it stand
out! SWS 2006 9
Conditions of Monopolistic Competition

Non-Price Competition:
 Non-Price Competition involves the advertising of a
product's appearance, quality, or design, rather than its
price.
 Advertising to help the consumer believe that this product
is different and worth more money.

Notice these
commercials never
VS price.
mention
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Examples of Monopolistic Competition

Auto, Steel, Gas, Fast Food, Airlines.

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 MERGERS OF LARGE COMPANIES
 Sometimes companies fall victim to market failure. However,
not all businesses close their doors and empty their factories
and stores.
 Many get “swallowed up” by another company. This “take-
over” or acquisition of a company is known as a merger.

There are THREE types of mergers: HORIZONTAL, VERTICAL, and

CONGLOMERATE.
1.) HORIZONTAL: involve firms in the SAME market, such as between two oil
companies.
Reason: Diversification

2.) VERTICAL: involve one firm buying a resource provider.

EXAMPLE: steel company buys an automaker

3.) CONGLOMERATE: a company buys a business in an

UNRELATED industry.
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 What is an Oligopoly?
A market in which a two-three large sellers control most of the
production of a good or service and they work together on
setting prices.
Conditions of an Oligopoly
1) Very few Sellers that control the entire market.
2) Products may be differentiated or identical (but
they are usually standardized)
3) Medium barriers to entry: Difficult to Enter the
market because the competitors work together
to control all the resources & prices.
4) The actions of one affects all the producers.
5) Collusion = an agreement to act together or
behave in a cooperative manner.
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 What is an Oligopoly?
A market in which a two-three large sellers control
most of the production of a good or service and they
work together on setting prices.

Conditions of Oligopoly
1) Collusion = an agreement to act together or
behave in a cooperative manner.
 Collusion Agreements: usually illegal, among
producers to fix prices, limit output, or divide markets.
(hard to prove that a group of companies is doing this)
 It is also called Price Fixing: setting the same
prices across the industry.
THIS IS IN VIOLATION OF ANTI-TRUST LAWS. WHY?
Basically, the companies are acting a one large monopoly.

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 Monopoly
Exact Opposite of Pure Competition.
 A price maker. (set their own price, without regard to
supply and demand)

There is a single seller

No close substitute goods are available

High Barriers to Entry: Other sellers cannot enter the Market.

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 Types of Monopolies
4 Distinct Types of Monopolies:
1) Natural Monopoly: Where costs are minimized by having a single
producer of the product.
 Gas, water, electricity: government creates Natural Monopolies
by Franchising some utilities.
 Franchise - the right to produce or do business in a certain
area without competition.
 Government franchises come with government regulation.

WHY WOULD GOVERNMENT DO THIS???

Economies of Scale: As natural monopolies grow larger, this reduces

its production costs (economies of scale).
 Because normally companies become more efficient as the firm
becomes larger.
 Example: It is cheaper for the Nigerian government to
provide power than twoSWSor
2006 three companies. 16
 Types of Monopolies

2) Geographic Monopoly: The only business in a location due to size

of market. E.g only one supermarket in a remote town.

EXAMPLE: Only
person selling
water in the
desert.

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 Types of Monopolies

3) Technological Monopoly: Firm has discovered

a new process or product.
Constitution gave government the right to
grant technological monopolies.
 Patent: 17 years exclusive rights to a
developed technology.
 Copyright: (Artists and writers) Life plus 50
years.

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 Types of Monopolies

4) Government Monopoly: Retained by the

government.
 Liquor sales in some counties, uranium
production, water, etc.

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3 Conditions of Efficient & Successful
Markets
Markets work best when three conditions are met:
1) Adequate competition must exist in all markets.
2) Buyers and sellers are reasonably well-informed
about conditions and opportunities.
3) Resources must be free to move from one
industry to another.

Market Failure occurs when any of the 3 conditions

alter significantly.

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 Types & Causes for Market Failure
1) Inadequate Competition: Dangers to monopolies
 Monopolies may waste and misallocate scarce resources
because there is no competition.

2) Inadequate Information: A free enterprise economy

requires information.
 It is difficult to employ resources for the fullest benefit of
society without adequate information.
3) Resource Immobility: The efficient allocation or resources
require that land, labor, capital and entrepreneurs be free to move
to markets where returns are the highest
4) Externalities / Side Effects: A side effect that benefits or harms
a third party that was not directly involved in the activity.
 Negative Externality: People are harmed or inconvenienced
by an economic decision.
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 The Role of Government

Government has the power to maintain competition,

regulate monopolies, or to run government-owned
monopolies.
 Since the late 1800s the US have passed laws to
restrict and regulate monopolies and trusts.

 Trust: a legally formed combination of

companies.

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 Market Structure
Perfect Pure
Competition Monopoly

More competitive (fewer imperfections)

 Market Structure
Perfect Pure
Competition Monopoly

Less competitive (greater degree

of imperfection)
Features of the four market structures
Market Flexibilities

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The performance analysis of a Flexible
Market be based on;
•The reduction of cycle time
•The real-time response to market demand
(Agile Manufacturing)
•The reduction of production lead time
•The throughput time
•Elimination of waste (Lean Manufacturing)

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 Performance Analysis of a flexible market (Under
Delivery Flexibility)
A new company has just introduced a drone to deliver goods to their
customers.
The analysis of Drone (UAV) systems is used to determine
I. The number of UAV required
II. Cycle Times
III. Handling System Efficiency

It is assumed that the vehicle operates at a constant speed of V.

The time for a typical delivery cycle in the operation of the vehicle
includes
I. Loading at the pick up station
II. Unloading at the drop off stations
III. Travel time to the drop off station
IV. Empty Travel time of the vehicle between deliveries
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• Therefore, the total cycle time per delivery per vehicle is given by
• Tv = Tl + Tu +Ld/v + Le/v
• Where, Tv = Delivery cycle time (min/ delivery)
• Tl = Pick up time (min)
• Tu = Drop off time (min)
• Th = Tl + Tu = Handling time (min)
• Ld= Distance the vehicle travels between load and unload station (m)
• Le = Distance the vehicle travels empty until the state of next deliver cycle (m)
• v = velocity (m/min)
• Eh = Handling system efficiency
• Ft = Traffic factor between 0.85 and 1 (the possible time losses include
availability, traffic congestion and efficiency of manual drivers)
1. Number of deliveries per hour per vehicle = 60 Ft/Tv orNumber of
deliveries per hour per vehicle = (60 Eh) (Ld/v)
2. Handling system efficiency = ((Ld/v) * Ft))/ (Ld/v + Th + Le/v)

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 Exercise 1
ABUAD farms have just started producing fish for commercial
purpose and the farm must be able to make 65 deliveries per
hour, in order to have an edge in the competitive market. The
following are the data of performance characteristics of the
system;
• Vehicle velocity = 150 m/min
• Average distance travelled per delivery = 450m
• Pick up time = 0.75min
• Drop off time = 0.75 min
• Average distance traveling empty = 300m
• Traffic Factor = 0.9

1.Determine the number of vehicles required to meet the

demand of delivery.
2.Also, determine the handling system efficiency.
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