Market Structure Original Unit 3
Market Structure Original Unit 3
Perfect Imperfect
Competition Competition
Perfect Pure
Competition Monopoly
Oligopol Monopol
Monopolistic Competition Duopoly
y y
Perfect Competition
Characteristics:
– Large number of firms
– Products are homogenous (identical) – consumer
has no reason to express a preference for any firm
– Freedom of entry and exit into and out of the industry
– Firms are price takers – have no control over the price they
charge for their product
– Each producer supplies a very small proportion of total
industry output
– Consumers and producers have perfect knowledge about the
market
– buyers are small and quantity supplied is insignificant, sellers
are small and quantity bought is also insignificant
– Market is well organised and trading is a continuous process
– There are many competitors (both sellers and buyers) each
acting independently
– The market price must be flexible over a period of time
constantly rising and falling in response to changing conditions
of supply and demand
Distinction between Pure and Perfect competition:
Diagrammatic Given the assumption of profit maximisation, the firm produces at an output
where MC = MR (Q1). This output level is a fraction of the total industry supply.
representation The average cost curve is the standard ‘U’ – shaped curve. MC cuts the AC curve
at its lowest point because of the mathematical relationship between marginal and
average values.
Cost/
Revenue M The MC is the cost of producing
additional (marginal) units of
C output. It falls at first (due to the
law of diminishing returns) then
A rises as output rises.
P = MR =
AR The industry price is
determined by the
demand and supply of
the industry as a whole.
The firm is a very small
supplier within the
industry and has no
Q Output/ control over price. They
1 Sales will sell each extra unit for
the same price. Price
therefore = MR and AR
Monopolistic or Imperfect Competition
£0.60
Oligopoly
If the firm seeks to lower its price to gain a competitive advantage, its
Pric rivals will follow suit. Any gains it makes will quickly be lost and the %
e change in demand will be smaller than the % reduction in price – total
revenue would again fall as the firm now faces a relatively inelastic
demand curve.
£
5
Total
Revenue
B
Total Revenue A
D=
Total Revenue B Kinked D Curve elastic
D = Inelastic
100 Quantit
y
Duopoly
• Market structure where the industry is dominated
by two large producers
– Price leadership by the larger of the two firms may exist – the
smaller firm follows the price lead
of the larger one
– Highly interdependent
– High barriers to entry
– Duopoly – when 2 firms dominate an industry. Coke products have
43% of the market and Pepsi products have 32%.
Monopoly
• Pure monopoly – where only one producer exists in the industry
• In reality, rarely exists – always some form of substitute available!
• Monopoly exists, therefore, where one firm dominates the market
• Firms may be investigated for examples of monopoly power when
market share exceeds 25%
• Monopoly power – refers to cases where firms influence the market in
some way through their behaviour – determined by the degree
of concentration in the industry
– Influencing prices
– Influencing output
– Erecting barriers to entry
– Pricing strategies to prevent or stifle competition
– May not pursue profit maximisation – encourages unwanted
entrants to the market
– Sometimes seen as a case of market failure
Monopoly
• Origins of monopoly:
– Through growth of the firm , Through amalgamation, merger
or takeover, Through acquiring patent or license
– Through legal means – Royal charter, nationalisation, wholly owned
place
• characteristics of firms exercising monopoly power:
• Price – could be deemed too high, may be set to destroy competition
(destroyer or predatory pricing), price discrimination possible.
• Efficiency – could be inefficient due to lack of competition or… could
be higher due to availability of high profits.
• Innovation - could be high because of the promise of high profits,
Possibly encourages high investment in research and development
(R&D)
• High levels of branding, advertising and non-price competition
• Monopolies not always ‘bad’ – may be desirable in some cases but
may need strong regulation.
• Monopolies do not have to be big – could exist locally
Features of Monopoly:
• There is single producer or seller of a product
• There is a complete absence of competition
• There is no close substitute for the product
• There is complete control over the market supply on the
part of the monopolist.
• There is no distinction between firm and industry
• There is prevention of entry of new firm in the long run.
• Monopolist is a price-maker and not a price taker. He is
independent of making his price decisions.
• He can fix both price and output to be sold in the market.
• The aim of the monopolist is to maximize his total money
profits.
• He will be in equilibrium at the price-output level at which
his profits are maximum.
Government Monopoly Natural Monopoly
Owned & operated by Competition would be
G chaotic. It is natural
Ex: State Highways, to give it to one co.
Postal, Rail services Ex: Utilities
Cable TV
“Price Makers”
Monopoly
[mono(1) poly (seller)]
Control over price:
Total
Product: unique
Technological Monopoly
Geographic Monopoly
“Patent”
Only seller in a specific
Ex: Process and
area
product
Example: Remote Store
economic products needed for the public welfare . Most tend to provide goods
that enhance the general welfare rather than seek profits.
Geographic Monopoly – when a firm is the only seller of a good in a
specific location.
Technological Monopoly – results from the invention of a new product
(patent) or when technology changes the way a good is produced. Production
submarines, Super computers, medicine to cure cancer.
Voluntary, Legal and Social otherwise called as Government Monopoly also
exist.
Reasons for Monopoly:
1.Restriction by Law: when government makes it a law no to
allow
any competition in the production and distribution of a particular
product. (EB, Army, Water Service, Tourist Places)
2. Control over Key raw materials: when the strategic raw
material
To produce a particular commodity is scarce and is fully
controlled
by a single firm, that firm may not allow the use of this important
Raw material by other firm and may thus acquire monopoly
status.
Eg. Nuclear weapons.
3. Specialized Technology – technique of production
4. Economies of Scale – a single firm being large can eliminate
competition by reduces its cost to low level without affecting the
Discriminating Monopoly: Price discrimination exists when
the same
product is sold at different prices to different buyers. Eg.
Different
locations of seats with limited features as in train, theatre,
aircraft.
Is monopoly an unmixed evil?
1. A monopoly firm generally possess large financial
resources. It can thus sufficiently on innovation and
technological progress so as to introduce new inventions
and better techniques.
2. Monopoly also enables savings in expenditure on
advertisement.
3. Large capital investment and confidentiality and service to
public and no profit is needed for few services, eg.
Electricity, water, transport, army in such cases monopoly
is exercised.
Competition and the Market Structure
Price Control and the Market Structure
Least control over price
Some Extensiv
e
Fair amount
Fair with Extensiv
differentiated e
Amount
oligopolies
Cable TV
Water