1. Competitive Market

2. Market structure
Market structures are the characteristics of a market which determine firms’ behaviour
Key characteristics are:
The number of firms within the market and their size
The number of firms which enter the market
The ease or difficulty with which firms may enter the market
The extent to which goods in the market are similar
The extent to which all firms in the market share the same knowledge
The extent to which the actions of one firm will affect another firm

3. The number of firms in an industry
Varies from one to many
A monopoly – only one supplier in the market
An oligopoly – a market dominated by a few large producers
Perfect competition – a large number of small suppliers, none of whom are large enough to dominate the market

4. Market concentration
The degree to which large firms dominate an industry
Measured using concentration ratios which consider the market share of the leading firms in that industry

5. Concentration ratios
Are used to consider the importance in terms of market share in the industry of the dominant firms
Although oligopolistic markets may be dominated by a few large firms, there may be many smaller firms within the industry
Eg supermarkets, see handout

6. Barriers to entry
Firms will behave differently in markets where it is difficult for new entrants to access the market compared to markets where entry is easy
Where barriers to entry exist, they prevent potential competitors from entering an industry

7. Barriers to entry; capital costs
The initial start up costs may be so expensive as to prevent firms from entering a market
Eg setting up a specialised flow production plant requires major investment which only large companies are likely to be able to afford
Setting up a small retail outlet is comparatively cheap

8. Barriers to entry; sunk costs
Costs which aren’t recoverable if the business folds
Eg money spend on advertising cannot be recovered whereas equipment can be sold, albeit at a loss
Purchase price of capital equipment, less the resale price, plus cost of advertising = sunk costs
High sunk costs deter firms as the cost of failure is high
Low sunk costs mean relatively little to lose in the event of failure and encourage firms to enter the market (the theory of contestable markets)

9. Barriers to entry; scale economies
Where economies of scale are very large, a few firms operating at lowest average cost (optimum level of production) may satisfy total demand
Any new firm entering the market will produce less and so have much higher average costs
If a few firms cannot fully exploit the potential economies of scale, a natural monopoly may result, with just one firm being able to beat off any competition by producing at lowest cost

10. Barriers to entry; natural cost advantage
Some firms will have access to factors which are superior to others or are unique
Eg location; a site in a busy high street is preferable to one in a quiet side road
It is easier and cheaper to drill for oil in Saudi Arabia than the Derbyshire Dales
Consequently, these firms are able to produce at lower cost or generate higher revenues than their potential competitors

11. Barriers to entry; legal barriers
The law may prevent firms from entering the market eg:
Patent laws prevent competitor firms from making a product for a given number of years
Government broadcast licences restricts commercial TV companies
Nationalised industries may enjoy protected monopoly status as other firms are forbidden from entering the market, eg Post Office

12. Barriers to entry; marketing barriers
High spending on advertising and marketing by existing firms can act as a barrier to entry
Purpose is to create a powerful brand image and make consumers associate a particular type of good with the firm’s product eg Coke, Hoover
Soap powder is a relatively low cost product, but it would cost in excess of £10m to launch a new brand nationally

13. Barriers to entry; limit pricing
Firms may choose to accept normal profits rather than maximise profits to keep out new entrants
Abnormal profits would attract competitors, which might drive down prices and profits
Firms accept lower profits in the short run to preserve profit in the long run
Limit pricing keeps new entrants out of the industry

14. Barriers to entry; anti-competitive practices
Restrictive practices such as suppliers refusing to sell to a firm which stocks a rivals goods or lowering prices for long enough to drive out a new entrant to the business

15. Innocent or deliberate?
Some barriers to entry occur inevitable; these are innocent entry barriers
Other barriers are deliberately created, such as marketing barriers, limit pricing and anti-competitive practices
Barriers vary between industry. Manufacturing incurs high capital costs, the service sector may have legal requirements or minimum qualifications

16. Barriers to exit Are usually low Include:
The cost and time of making employees redundant
Selling premises and stock
Notifying customers and suppliers
Costs increase when the firm is locked into a contract which it will have to pay to break, eg lease, penalty clause
When redundancy payments are high
It may pay the firm to stay in the industry making a small loss than to close down

17. Product homogeneity and branding
Producers cannot enjoy a monopoly position when goods are homogeneous (ie essentially identical, even though there are different grades of quality)
It is easier for firms to control markets if the goods are non-homogeneous
Goods can be differentiated by brands which builds up customer loyalty
Branding adds value; the customer is prepared to pay more for what is, essentially, a similar product
Marketing builds consumer perception that the branded product is superior and enables firms to charge higher prices; demand is relatively inelastic

18. Perfect knowledge
Exists when buyers and sellers have information about prices, output and products which is readily available
If one firm puts up its prices, it would lose all its business because customers would go elsewhere
Perfect knowledge implies that firms have access to all information which is available to all other firms
Not all firms will possess all knowledge; if they are inefficient they may not find out what is readily available
Perfect information does not mean that all firms know everything, only that they know what is known by other firms within the industry, eg farmers don’t know what the weather conditions will be in 6 months time

19. Imperfect knowledge Exists where there are industrial secrets
Firms may not know about rival’s new technology or new products
Information then acts as a barrier to entry preventing or discouraging firms from entering the market

20. Asymmetric knowledge When some firms know more than others
Firms with more information will be better placed to make decisions, giving them a competitive advantage
If firms have more information than customers, they may exploit their position and a misallocation of resources follows

21. Interrelationships within markets
Firms may be independent of each other; the actions of any one firm do not impact on another firm in the industry
Eg a farmer deciding to grow more wheat this year will have little impact on other wheat growers
Firms may be interdependent; the actions of one firm will have an impact on other firms. This is more likely to happen the fewer firms there are in the industry