1. Introduction to Market Structures

2. Markets and Market Structures What is a market? An arrangement where buyers and sellers of a particular good, service, or resource are linked together to carry out an exchange Local, National, or Global Product Markets  Goods and Services Resource/Factors Markets  Resources (Factors of Production) Firms and Industries  Market Structures

3. Types of Market Structure Type of market structure influences how a firm behaves in the marketplace: How it prices its goods/services Quantities it seeks to supply Willingness to enter/exit a market Incentives to drive efficiency in its operations Incentives to drive innovation in its product development

4. Types of Market Structure Four Main Categories: Perfect Competition Monopoly Monopolistic Competition Oligopoly

5. Types of Market Structure Key Characteristics (Clues) to the market structure: Number of firms in the industry Ability to control the price in the market Extent of product differentiation Barriers to entry

6. Market Structures at a Glance Type# of FirmsMarket Power/ Price Control Type of ProductBarriers to Entry Perfect Competition Very manyNoneUndifferentiated, standard, commoditized None MonopolyOne, largeVery significantOne product – no close substitutes High Monopolistic Competition Relatively many, relatively small SomeDifferentiatedVery low OligopolyFew, largeSignificantDifferentiated or undifferentiated High

7. Market Structure – Perfect Competition Perfect Competition: Free entry and exit to industry – potential for many firms 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 Examples?

8. Market Structure – Perfect Competition Advantages of Perfect Competition: High degree of competition helps allocate resources to most efficient use Price = Marginal Costs Normal profit made in the long run Firms operate at maximum efficiency Consumers benefit

9. Market Structure – Perfect Competition What happens in a competitive environment? New idea? – firm makes short term abnormal profit Other firms enter the industry to take advantage of abnormal profit Supply increases – price falls Long run – normal profit made Choice for consumer Price sufficient for normal profit to be made but no more!

10. Market Structure – 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 Examples?

11. Market Structure - Oligopoly Industry dominated by small # of large firms High barriers to entry Products could be highly differentiated Interdependence - Potential for collusion? Abnormal profits Examples?

12. Market Structure - Monopoly Pure monopoly – the industry is the firm! Actual monopoly – often defined as one firm with >25% market share A monopoly may be supported by government High fixed costs (Gas, electricity, water, telecoms, rail) Public is better served by one provider Requires some level of oversight by government Examples?

13. Market Structure Monopoly: High barriers to entry Firm controls price OR output/supply Abnormal profits in long run Possibility of price discrimination Consumer choice limited Prices in excess of MC