1. Market Structure By Group #1: Silvia Luque Kyoungoung Min Jasung Park
Charlie Li Qian
Samantha Rodriguez

2. Five Types of Market Structure
Perfect Competition
Monopolistic Competition
Oligopoly
Oligopsony
Monopoly

3. Perfect Competition
Economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices.

4. Description of Perfect Competition
Efficient outcome
Foundation of the theory of supply and demand
Market equilibrium
Resources and allocated and used efficiently
Collective social welfare is maximazed

5. Requirements Atomicity > Small producers & consumers Homogeneity
Goods & services are substitutes = no product differentiation
Perfect &complete info.
Firms & consumers know the prices set by all firms
Equal access
Production technologies & resources perfectly mobile
Free entry
Any firm may enter or exit the market
Individual buyers and sellers act independently
No scope for groups to change price

6. Why does a Perfect Competition firms demand curve is also its marginal revenue curve?
For a perfectly competitive firm with no market control, the marginal revenue curve is a horizontal line. Because a perfectly competitive firm is a price taker and faces a horizontal demand curve, its marginal revenue curve is also horizontal and coincides with its average revenue (and demand) curve.

7. Perfect Competition Graph

8. Example of Perfect Competition
eBay auctions can be often be seen as perfectly competitive. There are very low barriers to entry (anyone can sell a product, provided they have some knowledge of computers and the Internet), many sellers of common products and many potential buyers.
In the eBay market competitive advertising does not occur, because the products are homogeneous and this would be redundant. However, generic advertising (advertising which benefits the industry as a whole and does not mention any brand names) may occur.

9. Free Software: Example of Perfect Competition
Free software works along lines that approximate perfect competition. Anyone is free to enter and leave the market at no cost. All code is freely accessible and modifiable, and individuals are free to behave independently.

10. Monopolistic Competition

11. Monopolistic Competition
Characteristics:
A large number of firms- it is like perfect competition
Entry easy – few barriers to entry and exit, so it is unlike monopoly
Differentiated products– they are therefore closed, but not perfect, substitutes so, they have market power(it means each firm has a unique product)

12. Monopolistic Competition
The strategies for Differentiated products
Fast-food market
Mac Donald's, Taco-Bell, and Wendy’s
Brand Name
Starbucks

13. Monopolistic Competition
Implications for the diagram:
Above-Normal Profit
In the Short Run
A monopolistically competitive firm faces a Downward-sloping demand curve. The firm maximizes profit by producing Q1, where MR=MC, and charging a price, P1, given by the demand curve above Q1. Profit is the rectangle CBAP1. MC
Price
ATC P1
Abnormal Profit
C=ATC
Demand MR Q1
Quantity

14. Monopolistic Competition
Implications for the diagram:
Normal Profit MC
Notice that the existence of more substitutes makes the new AR (D) curve more price elastic. The firm reduces output to a point where MC = MR (Q2). At this output AR = AC and the firm will make normal profit.
Price
ATC P
AR(D)
Demand MR MR Q2 Q1
Quantity

15. Monopolistic Competition
Implications for the diagram:
Economic Loss MC
Because there is relative freedom of entry and exit into the market, new firms will enter encouraged by the existence of abnormal profits. New entrants will increase supply causing price to fall. As price falls, the MR curves shift inwards as revenue from each sale is now less.
Price
ATC
C=ATC
Loss P1 D MR Q1
Quantity

16. Monopolistic Competition
Implications for the diagram:
Entry and Normal Profit
ATC
This is the long run equilibrium position of a firm in monopolistic competition.
In a monopolistically competitive industry, entering firms produce a close substitute, not an identical or standardized product. MC
Price
D2 =ATC D1 D2 MR Q2
Quantity

17. Perfect and Monopolistic Competition Compared
The perfectly completive firm produces at the point where the price line, the horizontal MR curve, intersects the MC curve. This is the bottom of the ATC curve in the long run, quantity Qpc at price Ppc . The monopolistically competitive firm means that the quantity produced, where MR=MC. The downward-sloping demand curve faced by monopolistically competitive firm means that the quantity produced, Qmc is less than the quantity produced by the perfectly competitive firm, Qpc. The price charged by the monopolistically competitive firm is also higher than that charged by the perfectly competitive firm, Pmc versus Ppc. In both cases, however, the firms earn only a normal profit. MC
Price
ATC
Pmc
Ppc
MRpc =Dpc
Dmc
MRmc
Qmc
Qpc
Quantity

18. Monopolistic Competition
In each case there are many firms in the industry
Each can try to differentiate its product in some way
Entry and exit to the industry is relatively free
Consumers and producers do not have perfect knowledge of the market – the market may indeed be relatively localised.

19. Monopolistic Competition
Restaurants
Plumbers/electricians/local builders
Private schools
Plant hire firms
Insurance brokers
Health clubs
Hairdressers
Estate agents
Damp proofing control firms

20. OLIGOPOLY
An OLIGOPOLY is a market form in which a market or industry is dominated by a small number of sellers(Oligopolists)

21. Example of Oligopoly around our life in U.S.A.

22. Fast foods
McDonalds, Burger King, KFC

23. Bookstores
Amazon, Barnes & Noble

24. Oils
Shell, ExxonMobil

25. Electrical goods
SONY, Dell

26. Mobile phone networks
Verizon, AT&T

27. Characteristics of Oligopoly
Product Branding
Entry barriers
Interdependent decision-making
Non-price competition

28. A market dominated by many sellers and a few buyers
Oligopsony
A market dominated by many sellers and a few buyers

29. Definition of Oligopsony
An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large.
This typically happens in market for inputs where a small number of firms are competing to obtain factors of production.
It contrasts with an oligopoly, where there are many buyers but just a few sellers.
An oligopsony is a form of imperfect competition.

30. Cocoa: Example of Oligopsony

31. Three Buyers of Cocoa Bean
Three firms buy the vast majority of world cocoa bean production, mostly from small farmers in third-world countries.

32. Tobacco in US: Example of Oligopsony

33. Three Major Buyers of Tobacco in US
Three companies (Altria, Brown & Williamson, and Lorillard Tobacco Company) buy almost 90% of all tobacco grown in the US.

34. Characteristics of Oligopsony
The buyers have a major advantage over the sellers.
They can play off one supplier against another, thus lowering their costs.
They can also dictate exact specifications to suppliers, for delivery schedules, quality, and (in the case of agricultural products) crop varieties.
They also pass off much of the risks of overproduction, natural losses, and variations in cyclical demand to the suppliers.

35. What is a Monopoly?
A monopoly is a market structure in which there is a single supplier of a product .
“Monopoly" is a term from economics that refers to a situation where only a single company is providing an irreplaceable good or service.

36. How do Monopolies Occur?
This was a side effect of being the inventor of a product for which there is high demand but no preexisting supply. Other monopolies occur when consolidation across industries results in a single supplier. This was the case with the company Standard Oil, which had to be broken up by the government in 1911.

37. Description of a Monopoly
One firm that produces a good that is desired by customers
The firm in question is the only place where the good or service can be found, they have the ability to charge whatever they want, to the damage of market competition that is the foundation of a healthy economy.

38. Advantages of a Monopoly
Research and Development. Supernormal Profit can be used to fund high cost capital investment spending. Successful research can be used for improved products and lower costs in the long term.
Economies of scale. Increased output will lead to a decrease in average costs of production. These can be passed on to consumers in the form of lower prices.

39. Disadvantages of a Monopoly
Price and Lower Output than under Perfect Competition. This leads to a decline in consumer surplus and a deadweight welfare loss
A monopoly is productively inefficient because it is not the lowest point on the Average Cost curve

40. Disadvantages of a Monopoly (Continued)
A Monopolist makes Supernormal Profit leading to an unequal distribution of income.
A monopoly may use its market power and pay lower prices to its suppliers.

41. Graphing a Monopoly

42. Example of a Monopoly
A recent example of a monopoly would be that of the pharmaceutical giant Pfizer over the drug Viagra®, which at the time of its release had no substitutes or competitors.
Microsoft; settled anti-trust litigation in the U.S. in 2001; fined by the European Commission in 2004, which was upheld for the most part by the Court of First Instance of the European Communities in The fine was 1.35 Billion USD in 2008 for incompliance with the 2004 rule

43. Monopolistic Competition43

44. Monopolistic Competition
Characteristics:
A large number of firms- it is like perfect competition
Entry easy – few barriers to entry and exit, so it is unlike monopoly
Differentiated products– they are therefore closed, but not perfect, substitutes so, they have market power(it means each firm has a unique product) 44

45. Monopolistic Competition
The strategies for Differentiated products
Fast-food market
Mac Donald's, Taco-Bell, and Wendy’s
Brand Name
Starbucks

46. Monopolistic Competition
Implications for the diagram:
Above-Normal Profit
In the Short Run
A monopolistically competitive firm faces a Downward-sloping demand curve. The firm maximizes profit by producing Q1, where MR=MC, and charging a price, P1, given by the demand curve above Q1. Profit is the rectangle CBAP1. MC
Price
ATC P1
Abnormal Profit
C=ATC
Demand MR Q1
Quantity

47. Monopolistic Competition
Implications for the diagram:
Normal Profit MC
Notice that the existence of more substitutes makes the new AR (D) curve more price elastic. The firm reduces output to a point where MC = MR (Q2). At this output AR = AC and the firm will make normal profit.
Price
ATC P
AR(D)
Demand MR MR Q2 Q1
Quantity

48. Monopolistic Competition
Implications for the diagram:
Economic Loss MC
Because there is relative freedom of entry and exit into the market, new firms will enter encouraged by the existence of abnormal profits. New entrants will increase supply causing price to fall. As price falls, the MR curves shift inwards as revenue from each sale is now less.
Price
ATC
C=ATC
Loss P1 D MR Q1
Quantity

49. Monopolistic Competition
Implications for the diagram:
Entry and Normal Profit
ATC MC
This is the long run equilibrium position of a firm in monopolistic competition.
In a monopolistically competitive industry, entering firms produce a close substitute, not an identical or standardized product.
Price
D2 =ATC D1 D2 MR Q2
Quantity

50. Perfect and Monopolistic Competition Compared
The perfectly completive firm produces at the point where the price line, the horizontal MR curve, intersects the MC curve. This is the bottom of the ATC curve in the long run, quantity Qpc at price Ppc . The monopolistically competitive firm means that the quantity produced, where MR=MC. The downward-sloping demand curve faced by monopolistically competitive firm means that the quantity produced, Qmc is less than the quantity produced by the perfectly competitive firm, Qpc. The price charged by the monopolistically competitive firm is also higher than that charged by the perfectly competitive firm, Pmc versus Ppc. In both cases, however, the firms earn only a normal profit. MC
Price
ATC
Pmc
Ppc
MRpc =Dpc
Dmc
MRmc
Qmc
Qpc
Quantity

51. Monopolistic Competition
In each case there are many firms in the industry
Each can try to differentiate its product in some way
Entry and exit to the industry is relatively free
Consumers and producers do not have perfect knowledge of the market – the market may indeed be relatively localised.

52. Monopolistic Competition
Restaurants
Plumbers/electricians/local builders
Private schools
Plant hire firms
Insurance brokers
Health clubs
Hairdressers
Estate agents
Damp proofing control firms 52

53. References http://en.wikipedia.org/wiki/Market_structure