Urban Development Economics-

UDE20BE

Mr P. Lesia
LECTURER | DEPARTMENT OF BUILT ENVIRONMENT
TYPES OF MARKET STRUCTURE IN THE CONSTRUCTION
INDUSTRY
 INTRODUCTION
• Market is the place where the goods or
services or commodities change hands
between the seller and the buyer.
• It is the place where the exchange of
goods and services are happening
between the buyer and the seller.
• The number of firms determines the
structure of the market producing and
selling the product.
 Types of markets
There are two types of markets:
1.Perfect markets
2.Imperfect markets
• Perfect markets are the markets where the
market is perfectly competitive and there is full
information available to the buyers (consumers)
and sellers (producers).
• Imperfect markets are the markets where there
is a lack of competition and excessive market
power.
 Perfect markets
Characteristics:
1.There are many buyers and sellers
2.Low prices prevail
3.There is high out and large choice
4.Products are homogenous
5.There are low barriers to entry
6.Information is perfect
 Imperfect markets
Characteristics:
1.There is market power
2.Firms are price setters
3.The products are heterogeneous
4.There are high barriers to entry
 MARKET STRUCTURES

Four types of market structures

1.Perfect competition
2.Monopoly
3.Monopolistic competition
4.Oligopoly
 PERFECT COMPETITION
Definition:
• Perfect competition or a perfect market occurs
where none of the individual market participants
(i.e. buyers and sellers) can influence the price
of the product.
• Firms in this market structure are price takers,
i.e. they have no control over the price of the
product and cannot influence the market price.
 PERFECT COMPETITION
Characteristics:
∙ A large numbers of buyers and sellers: No individual can
influence the market price.
∙ Products are homogenous: Their quality and appearance are
the same, and the price and quality will be the same whenever
you buy or sell the product.
∙ There is complete freedom of entry and exit: The market is fully
accessible and there are no legal, financial, technological or
other restrictions to entry or exit from the market.
∙ The factors or production are completely mobile: They can
move freely between markets.
 PERFECT COMPETITION
Characteristics:
∙ Buyers and sellers have full and accurate information on the
market conditions: This knowledge allows them to switch their
purchasing to other businesses.
∙ Collusion between sellers does not occur: Each seller acts
independently.
∙ Government intervention does not occur: This ensures buyers
and sellers have freedom to trade.
 PERFECT COMPETITION
Criticisms
• The perfect business and the perfect world do
not exist in reality.
• The assumption that producers have equal
access to resources is not true.
• Consumers do not always act rationally and
don’t have perfect knowledge.
• Producers’ costs vary from one business to the
next and depend largely on how efficiently the
producers manage their business.
 Revenue/ Demand and Supply in
Perfect Competition

The supplier (seller) perceives

S
demand as a horizontal line
(perfectly elastic). If the seller tries
to charge a higher price then
buyers will go elsewhere and he
will sell nothing
Industry output
P=AR=MR=D and the price
Price

5 5
fixed by supply
Demand as perceived by the and demand

Price
firm who is the price-taker
0 0

Quantity Quantity demanded and supplied

 WHAT IS A MONOPOLY?

Definition:
• Monopoly: a firm that is the only seller of
a good or service with no close
substitutes.
• A single firm is the sole producer of the
good or service.
 MONOPOLY
Characteristics:
• No close substitutes for product or service.
• There are certain barriers to entry.
• The firm controls the production and fixes the price – a price-
maker.
• High barriers to entry
• Firm controls price OR output/supply
• Abnormal profits in long run
• Possibility of price discrimination
• Consumer choice limited
• Prices in excess of MC
 MONOPOLY
Advantages:
• May be appropriate if natural monopoly
• Encourages R&D
• Encourages innovation
• Development of some products not likely
without some guarantee of monopoly in
production
• Economies of scale can be gained –
consumer may benefit
 MONOPOLY
Disadvantages:
• Exploitation of consumer – higher prices
• Potential for supply to be limited - less
choice
• Potential for inefficiency –
• X-inefficiency – complacency
over controls on costs
REASONS WHY MONOPOLIES
EXIST
 WHAT IS MONOPOLISTIC
COMPETITION?
Definition:
• Monopolistic competition – a market structure where
there are a large number of small firms which produce
non Homogenous products and there are no barriers to
exit or entry.
• It is the market structure that lies between pure
monopoly and perfect competition.
• The monopolistic competition model makes the same
assumptions as that of perfect competition except it is
assumed that each firm produces differentiated products
and therefore is a price maker.
 MONOPOLISTIC COMPETITION

Characteristics:
• There are a large number of buyers and sellers in the market.
Many buyers and sellers
• Easy entry into the market. There are no barriers to exit and
entry. Relatively free entry and exit.
• Firms try to maximise their profits in the short run.
• Products differentiated. Firms produce differentiated goods and
non homogeneous products.
• Firms are price makers. Firms have some control over price.
• Each firm may have a tiny ‘monopoly’ because of the
differentiation of their product
Imperfect or Monopolistic Competition
Examples – restaurants, professions – solicitors, etc., building
 WHAT IS OLIGOPOLY?
Definition:
• Oligopoly refers to a market structure in which
there are just a few firms that highly
interdependent (Myers, 2017).
• Oligopoly is characterised by a market where
few firms dominate the market. They are selling
either a homogenous or a heterogeneous
product.
• A few firms that dominate the market.
 OLIGOPOLY
Characteristics:
• Industry dominated by small number of large firms. Domination
of a small number of large firms (collusion can occur).
• Difficult entry into market or high barriers to entry
• Non–price competition. Firms use non-price strategies to attract
customers.
• Firms sell identical products or differentiated products. Products
could be highly differentiated – branding or homogenous
Oligopoly – Competition amongst the few
• Many firms may make up the industry
• Potential for collusion?
• Abnormal profits
• High degree of interdependence between firms
 OLIGOPOLY
Examples of oligopolistic structures:
• Supermarkets
• Banking industry
• Chemicals
• Oil
• Medicinal drugs
• Broadcasting
Market structure
Criteria
 Summary market structures
Criteria Perfect Competition Monopolistic Oligopoly Monopoly
Competition
Output Output is high. The firm Due t the existence of The output is higher than Output is limited to the
has no choice but to many suppliers, output under monopoly but is still individual firm’s output as
provide whatever is high across most of restricted to 3 to 5 large the firm is the market
quantity the market the market firms (single seller)
desires.
Barriers to entry There are no barriers to Barriers are low or non- High, but not as high as There are high barriers to
entry ad new firms can existent. Some firms are monopoly. Start-up costs entry as the firm uses
enter the market at will merely able to market and advertising prevent marketing and technical
their product more new firms entering with knowledge to restrict
efficiently than others. ease. entry.
Availability of Any new firm entering Any new firm entering Existing firms in the market The technical knowledge
information the market has perfect the market has perfect may have technical referred to above is not
information information information that new available to new firms
entrants are unable to
acquire
Size of profits Profits are normal Small and limited to Supernormal profits in the Supernormal profits even
normal long-run in the long-run
Nature of the product The product is Heterogeneous / Homogeneous or Unique product. Only one
homogenous and easy to differentiated heterogeneous product product with no close
replicate at low cost substitutes

Price The price is low. It is A small number of firms The price is high as few The price is high as the
determined by the are able to charge firms are able to dominate firm has market power
market and the firm has higher prices but the market with little
no power. competition keeps competition between them
prices relatively low.
 Thank you
for listening and learning!

⚫Questions & Answer Session