Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 1 Chapter 8 An Overview of Market Structures

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 2 Learning Objectives Define and describe the four basic models of alternative market structures, their assumptions, distinguishing features and operation. Explain, briefly, how each of these market structures relates to the demand side of the market.

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 3 Learning Objectives (cont.) List the determinants of market structure in our economy. Review other important elements of competition, and how they may lead to differences in the contestability of different types of markets. Provide a brief overview of the remainder of our study of microeconomics

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 4 Market Analysis Market behaviour depends on the degree of competition on both the demand and supply sides On the supply side a market could have anything between one and very many suppliers

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 5 Four Basic Market Models There are four market models with varying degrees of competition in supply: 1. pure competition 2. pure monopoly 3. monopolistic competition 4. oligopoly

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 6 Pure Competition Distinguishing characteristics: Very large number of sellers Standardised (homogeneous) product ‘Price taker’ – no individual firm can influence market price Free entry (and exit) Absence of non-price competition

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 7 Pure Competition (cont.) Examples: Precise examples of pure competition are rare Agricultural commodities fit quite well with competitive model – various agricultural crops – fruits – livestock

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 8 Pure Monopoly Distinguishing characteristics: Single seller No close substitutes ‘Price maker’ – the monopolist’s price is the market price Blocked entry Goodwill advertising

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 9 Pure Monopoly (cont.) Examples: Public utilities such as electricity and water Steel Sugar

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 10 Monopolistic Competition Distinguishing characteristics: Relatively large numbers Product differentiation Limited price control Relatively easy entry Non-price competition

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 11 Monopolistic Competition (cont.) Examples: retail trade some clothing items e.g. dresses petrol stations restaurants

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 12 Oligopoly Distinguishing Characteristics: Fewness Standardised or differentiated products Pricing interdependence – may lead to degrees of collusion Difficult entry Advertising and quality competition

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 13 Oligopoly (cont.) Examples: aluminium ingots (standardised) bank services beer (differentiated) information media

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 14 Buyers’ Side of Markets Perfect/pure competition – many buyers Monopsonistic competition – Fairly large number of buyers Oligopsony – Few buyers of the product Monopsony – Only one buyer of the product

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 15 Market Structure Based on Number of Buyers Bilateral monopoly – a single seller and one buyer Imperfect competition – all market structures that deviate from pure/perfect competitive model Market characteristics are equally applicable to resource markets

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 16 Factors Contributing to the Different Market Structures Legislation and government policies – Some promote competition and some monopoly The policies and practices of business firms – Mergers, consolidations, and foreign multinationals—monopoly/oligopoly Technological considerations

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 17 Other Competitive Dimensions Geographical factors – location can influence degree of competition Inter-industry competition – aluminium could face competition from other products Technological advances – new products and technology can change competitiveness over time

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 18 Contestable Markets Markets where entry to and exit from the industry can be accomplished at low or very low cost Market contestability limits the ability of monopolists to use pricing powers to achieve economic profits

Copyright  2004 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 7/e by Jackson and McIver Slides prepared by Muni Perumal, University of Canberra, Australia. 19 Next Chapter: The Costs of Production