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Market Models /Structures

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Presentation on theme: "Market Models /Structures"— Presentation transcript:

1 Market Models /Structures
Market Models /Structures* *are theoretical frameworks for existing firms and industries in the real world. Basic market models: 1. Pure/ perfect competition- a market situation where there is a large number of independent sellers offering identical products.

2 Characteristics of pure competition:
1. large number of independent sellers. 2. products are identical or homogeneous (the same). examples: farm products like rice, vegetables, fruits, etc No single Seller and BUYER can influence the change in market price of a product. - The rise or fall of market price is due to changes in total demand or total supply. 4. It is easy for new firms or sellers to enter the market and for existing firms or sellers to leave the market. NO significant barriers to entry….

3 Characteristics of Pure Monopoly:
5. no non- price competition like advertising, sales promotion, or packaging… 2. Pure Monopoly- refers to a market situation where there is only ONE seller or producer supplying unique goods and services. Characteristics of Pure Monopoly: 1. There is only ONE producer or seller.

4 2. Products are unique in the sense that there are no good or close substitutes The monopolist dictates the price (‘price maker’). Since he is the only supplier he can reduce his output in order to increase his price. Or he can increase his supply if this means an increase in his total profit. 4. It is extremely difficult for new firms to enter the market. There are formidable barriers like the very big capital…..The monopolist is an established giant…. 5. There may be or no extensive advertising or sales promotion on the goods or services..or maybe only for public relations..improving public image… Ex.?

5 3. Monopolistic competition
3. Monopolistic competition - pertains to a market situation where there is a relatively large number of SMALL producers or suppliers selling similar but not identical products.

6 Characteristics of Monopolistic competition:
1. There is a large number of sellers acting independently (about 100 sellers/ firms more or less) 2. Products are differentiated. This means physical differences as well as variations in location of the store, services of the sales staff, packaging…etc. 3. There is limited control of price. It is possible for some sellers to slightly reduce or increase their prices because of the differences of their products….. 4. Entry of new firms in the market is relatively easy. Compared to Pure Competition, it is difficult for firms to put up their business…..because of competition..requires effective sales promotion…..bigger capital.. ` 5. There is aggressive non- price competition in product quality, services, locations….etc..extensive advertising…

7 Example?

8 4. Oligopoly- is associated with a market situation where there are few firms offering standardized or differentiated goods and services. Includes a wider range of market structures than the other three markets models…

9 Characteristics of Oligopoly:
There are very few firms which dominate the market. Each firm produces a big portion of the total industry output. Products are identical or differentiated. Steel, zinc, lead, cement and other industrial raw materials are identical products. Finished goods like cars, airplanes, laptops are differentiated products. There is a price agreement among the producers to promote their own economic interests. The biggest among the producers is the price leader. ex. OPEC (Organization of petroleum exporting countries)

10 4. The entry of new competitors in the market is difficult.
It requires enormous capital and large scale production. It is very difficult for new firms to compete with existing firms because these are already well- established. 5. There is a strong advertising among those who produce differentiated products like cars, cigarettes, appliances. In case of identical products advertising is only for image building……..

11 Market Structures

12 Perfect Competition--many sellers of a standardized product
Monopolistic Competition--many sellers of a differentiated product, Oligopoly--few sellers of a standardized or a differentiated product Monopoly--a single seller of a product for which there is no close substitute

13 Pure/ Perfect Competition:
-Free entry and exit to industry -Homogenous product – identical so no consumer preference -Large number of buyers and sellers – no individual seller can influence price -Sellers are price takers – have to accept the market price -Perfect information available to buyers and sellers Monopolistic Competition -Many buyers and sellers -Products differentiated -Relatively free entry and exit -Each firm may have a tiny ‘monopoly’ because of the differentiation of their product -Firm has some control over price

14 Oligopoly – Competition amongst the few
-Industry dominated by small number of large firms -Many firms may make up the industry -High barriers to entry -Products could be highly differentiated – branding or homogenous -Non–price competition -Potential for collusion? -Abnormal profits -High degree of interdependence between firms Pure Monopoly: -industry is the firm! -Firm controls price OR output/supply -Abnormal profits in long run -Possibility of price discrimination -Consumer choice limited

15 TYPE Selllers Product Entry Example Pure competition many Homogenous free Rice/ corn trading Monopoly One NO Meralco Oligopoly Few Differentiated restricted OIL Monopolistic competition differentiated Relatively free Travel agency

16 In economics, markets are classified according to the structure of the industry serving the market.
Industry structure is categorized on the basis of market structure variables which are believed to determine the extent and characteristics of competition. Those variables which have received the most attention are number of buyers and sellers, extent of product substitutability, costs, ease of entry and exit, and the extent of mutual interdependence [Baumol, 1982; Colton, 1993]. In the traditional framework, these structural variables are distilled into the following taxonomy of market structures: (1) Perfect Competition--many sellers of a standardized product, (2) Monopolistic Competition--many sellers of a differentiated product, (3) Oligopoly--few sellers of a standardized or a differentiated product, and (4) Monopoly--a single seller of a product for which there is no close substitute.

17 Determinants of Market Structure
Government Laws and Policies. - in some industries, the government controls the degree of competition in the interest of the economy and the prevent abuses of monopolistic firms. 2. Technology. - because of technology good or better substitutes have been developed...thus monopoly has been transformed into oligopoly.... - the discovery of better technology by some firms has driven away less efficient competitors...

18 3. Business policies and practices
3. Business policies and practices. - the presence of giant firms discourage the entry of new firms with little resources....big firms attempt to eliminate/ reduce competition. 4. Economic Freedom. - economic freedom associated with free- enterprise economy have somehow changed market haw become survival of the fittest..

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