1. UNIT 7
MARKET STRUCTURE

2. MARKET STRUCTURE
Market structure is best defined as the organizational and other characteristics of a market. Traditionally, the most important features of market structure are: The number of firms The market share of the largest firms The nature of costs

3. The degree to which the industry is vertically integrated
The extent of product differentiation
The turnover of customers

4. TYPES OF MARKET STRUCTURE
PERFECT COMPETITION
MONOPOLISTIC COMPETITION
MONOPOLY
OLIGOPOLY
THESE MARKET STRUCTURES ARE DIFFERENT IN TERMS OF THEIR CHARACTERISTICS.

5. CHARACTERISTICS OF PERFECT COMPETITION
MANY PARTICIPANTS
HOMOGENOUS PRODUCTS
NO BARRIERS TO ENTRY
EACH FIRM IS A PRICE TAKER {Passive}
HIGH ECONOMIC EFFICIENCY

6. WEAK INNOVATIVE BEHAVIOUR

7. PERFECT COMPETITIVE FIRMS MAKING PROFITS IN THE SR & LOSSES IN THE LR
A higher price creates a profit opportunity in sector Y.
Simultaneously, lower prices result in losses in industry X.

8. MONOPOLY
This is a market in which there is only one supplier of the goods or services, many purchasers and there are no close substitutes.
Example NWC is a monopoly where pipe water is concern.

9. CHARACTERISTICS OF A MONOPOLY FIRM
One supplier and many buyers
Firm is a price maker
A monopoly firm faced a known demand curve
Large barriers to entry and exit

10. The Monopolist’s Profit-Maximizing Price and Output
The profit-maximizing level of output (Qm) occurs where MR = MC.
Notice that the outcome is different from that of perfect competition. Here, the price ($4.00) is less than the marginal cost ($1.50), and the monopolist earns positive economic profit.

11. Monopoly in the Long and Short-Run
It is possible for a profit-maximizing monopolist to suffer short-run losses and go out of business in the long-run.

12. Marginal Revenue and Market Demand
At every level of output except one unit, a monopolist’s marginal revenue is below price.

13. Marginal Revenue and Total Revenue
The marginal revenue curve shows the change in total revenue that results as a firm moves along the segment of the demand curve that lies exactly above it.
Total revenue is maximum when marginal revenue equals zero.

14. TYPES OF BARRIERS TO ENTRY
1. Government franchises, or firms that become monopolies by virtue of a government directive.
2. Patents or barriers that grant the exclusive use of the patented product or process to the inventor.
3. Economies of scale and other cost advantages enjoyed by industries that have large capital requirements. A large initial investment, or the need to embark in an expensive advertising campaign, deter would-be entrants to the industry. .

15. Ownership of a scarce factor of production: If production requires a particular input, and one firm owns the entire supply of that input, that firm will control the industry.

16. The Social Costs of Monopoly
Monopoly leads to an inefficient mix of output.
Price is above marginal cost, which means that the firm is under producing from society’s point of view.

17. The Social Costs of Monopoly
The triangle ABC measures the net social gain of moving from 2,000 units to 4,000 units (or welfare loss from monopoly).

18. Rent-Seeking Behavior
Rent-seeking behavior refers to actions taken to preserve positive profits.
A rational owner would be willing to pay any amount less than the entire green rectangle to prevent those positive profits from being eliminated as a result of entry.

19. Monopolistic Competition
Monopolistic competition is a common form of industry (market) structure characterized by:
large number of firms, none of which can influence market price by virtue of size alone.
Large number of purchasers
firms producing differentiated products

20. Some degree of market power is achieved by firms producing differentiated products
d. New firms can enter and established firms can exit such an industry with ease e.

21. Price/Output Determination in the Short Run
In the short-run, a monopolistically competitive firm will produce up to the point where MR = MC.
This firm is earning positive profits in the short-run.

22. Price/Output Determination in the Long Run
As new firms enter a monopolistically competitive industry, the demand curves of existing firms shift to the left, pushing MR with them.
In the long run, profits are eliminated. This occurs for a firm when its demand curve is just tangent to its average cost curve.
As new firms enter a monopolistically competitive industry in search of profits, the demand curves of profit-making existing firms begin to shift to the left, pushing marginal revenue with them as consumers switch to the new close substitutes. This process continues until profits are eliminated, which occurs for a firm when its demand curve is just tangent to its average cost curve.

23. Oligopoly
An oligopoly is a form of industry (market) structure characterized by:
1. a few dominant firms
2. many purchasers
3. products may be homogeneous or differentiated.
4. Firms are interdependent ie. the behavior of one firm depends on the behavior of the other

24. The Kinked Demand Curve Model
Above P*, an increase in price, which is not followed by competitors, results in a large decrease in the firm’s quantity demanded (demand is elastic).
Below P*, price decreases are followed by competitors so the firm does not gain as much quantity demanded (demand is inelastic).