2 Market StructuresType of market structure influences how a firm behaves:PricingSupplyBarriers to EntryEfficiencyCompetition
3 Degree of competition in the industry: Market StructuresDegree of competition in the industry:High levels of competition – Perfect CompetitionLimited Competition – MonopolyDegrees of competition in between
4 Market Structure Determinants of market structure Freedom of entry and exitNature of the product – homogenous (identical) differentiated?Control over supply/outputControl over priceBarriers to entry
5 Perfect Competition Free entry and exit to industry Homogenous product – identical so no consumer preferenceLarge number of buyers and sellers – no individual seller can influence priceSellers are price takers – have to accept the market pricePerfect information available to buyers and sellers
6 Perfect Competition Examples: Financial markets – stock exchange, currency markets, bond markets?Agriculture?To what extent?
7 Advantages of Perfect Competition High degree of competition helps allocate resources to most efficient usePrice = marginal costsNormal profit made in the long runFirms operate at maximum efficiencyConsumers benefit
8 What happens in a competitive environment? New idea? – firm makes short term abnormal profitOther firms enter the industry to take advantage of abnormal profitSupply increases – price fallsLong run – normal profit madeChoice for consumerPrice sufficient for normal profit to be made but no more!
9 Monopolistic Competition Many buyers and sellersProducts differentiatedRelatively free entry and exitEach firm may have a tiny ‘monopoly’ because of the differentiation of their productFirm has some control over priceExamples – restaurants, professions – lawyers, doctors, etc.
10 Oligopoly Competition amongst the few Industry dominated by small number of large firmsMany firms may make up the industryHigh barriers to entryProducts could be highly differentiated – branding or homogenousNon – price competitionPrice stability within the marketPotential for collusion?Abnormal profitsHigh degree of interdependence between firms
11 Oligopoly Examples of oligopolistic structures: Supermarkets Banking industryChemicalsOilMedicinal drugsBroadcasting
12 Monopoly Pure monopoly – industry is the firm! Actual monopoly – where firm has >25% market shareNatural Monopoly – high fixed costs – gas, electricity, water, telecommunications, rail
13 Monopoly High barriers to entry Firm controls price OR output/supply Abnormal profits in long runPossibility of price discriminationConsumer choice limitedPrices in excess of Marginal Cost
14 Advantages and Disadvantages of Monopolies May be appropriate if natural monopolyEncourages R&DEncourages InnovationDevelopment of some products not likely without some guarantee of monopoly in production.Economies of Scale can be gained – consumer may benefit
15 Advantages and Disadvantages of Monopolies Exploitation of consumer – higher prices,Potential for supply to be limited- less choicePotential for inefficiency – due to complacency over controls on costs