MARKET STRUCTURE CHARACTERISTICS

MARKET STRUCTURE FEATURES When Adam Smith published An Inquiry into the Nature and Causes of the Wealth of Nations (Wealth of Nations) in 1776, the average factory was small and businesses were competitive.

The prevailing philosophy that government’s role was limited to 1)protecting property, 2)enforcing contracts, 3) settling disputes, and 4) protecting firms against foreign competition was the French term-- Laissez-faire-- ‘allow them to do.’

TIMES HAVE CHANGED AND CONDITIONS ARE MUCH DIFFERENT TODAY.

Economists have created categories to explain the relationship firms have with:  prices  competition  products; and  entrepreneurship.

The groupings merely represent an effort to consolidate firms to help understand the market structure. An industry, or the supply side of the market, has many firms of different sizes producing slightly different products.

DESCRIPTION OF MARKET STRUCTURE FEATURES Market FeatureQuestions to Ask 1. Number of buyers and sellers Are there many, only a few or just one? 2. Product’s uniformity across suppliers Do firms in the market supply identical products or are products differentiated across firms? 3. Ease of entry into the market Can new firms enter easily or do natural or artificial barriers block them? 4. Forms of competition among firms Do firms compete based only on prices or are advertising and product differences also important?

DIVIDED INTO FOUR MODELS 1)pure competition, 2) monopolistic competition, 3) oligopoly; and 4) monopoly

Market structure describes the important features of a market, including: 1-the number of buyers and sellers 2-the product’s uniformity across suppliers 3-the ease of entry into the market and 4-the forms of competition among firms

PERFECT COMPETITION Identical products Many buyers and sellers No control over prices Many buyers and sellers Free market easy entry and exit

Set prices OLIGOPOLY Strategic dependence Government regulation Barriers to enter FEW large sellers (3-5) Economies of Scale Identical or similar products

Higher prices MONOPOLY Limited output Government regulation Barriers to enter Single seller Economies of Scale Unique product

Pricing competition IMPERFECT COMPETITION Large and small producers/suppliers Local markets Hard to enter Real or imagined advertising differences Close Substitutes Product not Identical Interdependent Control of prices

BARRIERS TO ENTRY ARE RESTRICTIONS ON THE ENTRY OF NEW FIRMS INTO AN INDUSTRY There are three (3) types of entry barriers: a) legal restrictions b) economies of scale c) control of an essential resource

BARRIERS TO ENTRY ARE RESTRICTIONS ON THE ENTRY OF NEW FIRMS INTO AN INDUSTRY Legal restrictions are patents, licenses and government restrictions that may provide some producers with legal protection against competition. Economies of scale is where a single firm can satisfy market demand and emerge as the sole supplier in the market. A situation in which the average cost of production falls as the firm gets larger. Control of essential resources owns all right to the main or key resource critical to production