Market Structure
By:
Lecturer, Department of Economics
Wolkite University
Wolkite , Ethiopia 1
Introduction: Market Structure
Market is the process of planning and implementing the
conception, pricing, promotion, and distribution of goods,
services and ideas to create exchanges that satisfy individual
and organizational objectives.
• Digital marketing is the marketing of products or services
using digital technologies, mainly on the internet but also
including mobile phones, display advertising, and any other
digital media.
• Physical market is a set up where buyers can physically meet
their sellers and purchase the desired merchandise from them
in exchange of money. 2
Perfectly Competitive Market (PCM)
Perfect competition is a market structure characterized by a complete
absence of rivalry among the individual firms.
A very large number of buyers and sellers of a product.
Firms producing a standardized(homogenous) product (that is, a
product identical to that of other producers)
Assumptions of PCM
• Large number of sellers and buyers
• Homogeneous product
• Perfect mobility of factors of production
• Free entry and exit
• Perfect knowledge about market conditions
• No government interference
Perfect information 3
Cont’d
A single producer under perfectly competitive market is a price-taker.
That is, at the market price, the firm can supply whatever quantity it would
like to sell.
PCM firm faces a completely horizontal or perfectly elastic demand curve.
For its product indicating that it can sell any amount of output only at the
ongoing market price ( P ).
The DD curve is also the average revenue (AR) and marginal revenue (MR)
curve.
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Short Run Equilibrium of The Firm
In the short run, the firm has a fixed plant.
It can adjust its output only through changes in the amount of
variable resources and it adjusts its variable resources to achieve the
output level that maximizes its profit.
Total Revenue (TR): It is the total amount of money a firm receives
from a given quantity of its product sold.
TR=P X Q
Average revenue (AR):It is the revenue per unit of item sold.
It is calculated by dividing the total revenue by the amount of the
product sold.
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Marginal Revenue: It is the additional amount of money/ revenue the
firm receives by selling one more unit of the product.
In a PCM, a firm‘s average revenue, marginal revenue and price of
the product are equal, i.e. AR = MR = P =DD.
Since the purely competitive firm is a price taker, it will maximize its
economic profit only by adjusting its output.
In the short run, the firm has a fixed plant. Thus, it can adjust its
output only through changes in the amount of variable resources.
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It adjusts its variable resources to achieve the output level that
maximizes its profit.
Two ways to determine the level of output of firm will realize
maximum profit or minimum loss.
1. Total Approach (TR-TC approach)
A firm maximizes total profits in the short run when the (positive)
difference between total revenue (TR) and total costs (TC) is
greatest.
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• 2. Marginal Approach (MR-MC)
• In the short run, the firm will maximize profit or minimize loss
by producing the output at which marginal revenue equals
marginal cost.
• Perfectly competitive firm maximizes its short-run total profits
at the output when the following two conditions are met:
1. MR = MC
2. The slope of MC is greater than slope of MR; or
3. MC is rising (that is, slope of MC is greater than zero).
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Proof !
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• The firm in the short- run gets positive or zero or negative
profit depends on the level of ATC at equilibrium.
• Depending on the relationship between price and ATC, the
firm in the short-run may earn;
– Economic profit
– Normal profit or incur loss and
– Decide to shut-down business
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1. Economic/positive profit: If the AC is below the market price
at equilibrium, the firm earns a positive profit equal to the
area between the ATC curve and the price line up to the profit
maximizing output.
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2. Loss: If the AC is above the market price at equilibrium, the
firm earns a negative profit (incurs a loss) equal to the area
between the AC curve and the price line.
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3. Normal Profit (zero profit) or break- even point: If the AC is
equal to the market price at equilibrium, the firm gets zero
profit or normal profit.
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4. Shutdown point: If P is smaller than AVC, the firm minimizes
total losses by shutting down. Thus, P = AVC is the shutdown
point for the firm.
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Short Summery Tables of the above Graph
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Illustration
Suppose that the firm operates in a PCM. The market price of
its product is $10.
The firm estimates its cost function is TC=2+10q-4q2+q3
A. What level of output should the firm produce to maximize
its profit?
B. Determine the level of profit at equilibrium.
C. What minimum price is required by the firm to stay in the
market?
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• B) Above, we have said that the firm maximizes its profit by
producing 8/3 units. To determine the firm‘s equilibrium profit we
have to calculate the total revenue that the firm obtains at this level of
output and the total cost of producing the equilibrium level of output.
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• C) To stay in operation the firm needs the price which equals at least
the minimum AVC. Thus, to determine the minimum price required to
stay in business, we have to determine the minimum AVC.
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Home Doing Exercise
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Reading Assignment!!!
Short Run Equilibrium of the Industry
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IMPERFECT MARKET STRUCTURE
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Pure Monopoly
• The opposite end of the spectrum of perfect market structures.
• Pure monopoly exists when a single firm is the only producer
of a product for which there are no close substitutes.
• The main characteristics of this market structure include:
1. Only one supplier of a product
2. The product has no close substitute (unique product)
3. Price maker/price setter
4. Blocked entry
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Cont’d
Monopoly firm is the sole seller of a product or service (for
example, a local electric utility).
Since the entry of additional firm is impossible, one firm
constitutes the entire industry.
Because the monopolist produces a unique product, it makes
no effort to differentiate its product and no close
substitutes.
A pure monopoly firm is a price setter, not price taker.
Consequently, profit maximizing condition is MR=MC and
MC is rising
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Sources of Monopoly
The emergence and survival of monopoly is attributed to the
factors which prevent the entry of other firms in to the
industry.
The barriers to entry are therefore the sources of monopoly
power.
The major sources of barriers to entry are:
1. Legal restriction
2. Control over key raw materials
3. Efficiency
4. Patent rights
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Monopolistic Competition Market
The market organization in which there are relatively many
firms selling differentiated products.
The market relatively many sellers producing differentiated
products.
The monopoly element results from differentiated products, i.e.
similar but not identical products.
A seller of a differentiated product has limited monopoly
power over customers who prefer his product to others.
His monopoly is limited because the difference between his
product and others are small enough that they are close
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substitutes for one another.
Characteristics of Monopolistic Competition
Differentiated product
similar but not identical in the eyes of the buyers.
Many sellers and buyers
But not as large as that of the perfectly competitive market.
Easy entry and exit
There is no barrier on new firms that are willing and able to
produce and supply the product in the market.
Existence of non-price competition:
In terms of product quality, advertisement, brand name,
service to customers, etc. 29
Oligopoly Market
Involves only a few sellers of an differentiated or similar
product
Each firm is affected by the decisions of its rivals and must take
those decisions into account in determining its own price and
output.
A special type of oligopoly where there are only two firms is
called duopoly
Characteristics of Oligopoly Market
Few dominant firms
There are few firms although the exact number of firms is
undefined.
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Cont’d
Interdependence: each firm is affected by the price and output
decisions of rival firms.
Entry barrier: there are considerable obstacles that hinder a new
firm from producing and supplying the product.
Barriers may include economies of scale, legal, control of
strategic inputs.
Products may be homogenous or differentiated.
Lack of uniformity in the size of firms
Non-price competition
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Market Model
Characteristic Pure Competition Monopolistic Oligopoly Pure
Competition Monopoly
Number of firms A very large Many Few One
number
Type of product Standardized Differentiated Standardized or Unique; no
differentiated close
substitutes
Control over price None Some, but within Limited by mutual Considerable
rather narrow limits interdependence;
considerable with
collusion
Condition of entry Very easy, no Relatively easy Significant obstacles Blocked
obstacles
Non price None Considerable Typically a great deal, Mostly public
competition emphasis on particularly with relations,
advertising, brand product differentiation advertising
names, trademarks
Examples Agriculture Retail trade, dresses, Steel, automobiles, Local utilities
shoes farm implements,
many household
appliances 32
THANKS!!!
THE END OF LECTURE FIVE!!!
THANKS!!! 33
