Market
Structures
What is Market
A market is where buyers and sellers can meet to facilitate the
exchange or transaction of goods and services.
Markets can be physical, like a retail outlet, or virtual, like an
e-retailer.
Examples include illegal markets, auction markets, and
financial markets
What is a Market
Structure?
The nature and degree of competition among firms in the
same industry
We classify 4 Market Structures by asking questions like:
Market Structures
Type of market structure influences how a firm
behaves:
Pricing
Supply
Barriers to Entry
Efficiency
Competition
Market Structures
Degree of competition in the industry
High levels of competition – Perfect competition
Limited competition – Monopoly
Degrees of competition in between
Market Structure
Determinants of market structure
Freedom of entry and exit
Nature of the product – homogenous (identical),
differentiated?
Control over supply/output
Control over price
Barriers to entry
We classify Market Structures
by asking:
1. How much control over price does
each firm have?
2. How many firms are competing in
the market?
3. How large/what size are each of the
firms?
4. What are the characteristics of the
products in each market?
5. How easy is it for new firms to enter
the market?
Market Structures
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
MARKET STRUCTURES:
Perfect Competition
MEETS 5 CONDITIONS:
1. LARGE NUMBER OF BUYERS AND SELLERS
2. BUYERS AND SELLERS DEAL IN IDENTICAL
PRODUCTS
3. BUYERS AND SELLERS ACT INDEPENDENTLY
4. BUYERS AND SELLERS ARE WELL-INFORMED
5. BUYERS AND SELLERS ARE FREE TO ENTER
INTO, CONDUCT, OR GET OUT OF BUSINESS
Market Structure
Perfect Competition:
Free entry and exit to industry
Homogenous product – identical so no
consumer preference
Large number of buyers and sellers –
no individual seller can influence price
Sellers are price takers – have to
accept the market price
Perfect information available to buyers
and sellers
Market Structure
Examples of perfect competition:
Financialmarkets – stock
exchange, currency markets,
bond markets?
Agriculture?
To what extent?
Market Structure
Advantages of Perfect Competition:
High degree of competition helps
allocate resources to most efficient
use
Price = marginal costs
Normal profit made in the long run
Firms operate at maximum
efficiency
Consumers benefit
Market Structure
What happens in a competitive
environment?
New idea? – firm makes short term
abnormal profit
Other firms enter the industry to take
advantage of abnormal profit
Supply increases – price falls
Long run – normal profit made
Choice for consumer
Price sufficient for normal profit to be
made but no more!
Imperfect
Competition-
lacks 1 or more of the 5
conditions
1. MONOPOLISTIC COMPETITION
2. OLIGOPOLY
3. MONOPOLY
Monopolistic
Competition
HAS EVERY CONDITION EXCEPT IDENTICAL PRODUCTS!
THESE FIRMS CAN MONOPOLIZE A SMALL PART OF THE MARKET BY:
1. PRODUCT DIFFERENTIATION – MAKE THEIR PRODUCT SEEM SPECIAL
THROUGH ADS
2. NON-PRICE COMPETITION - USE OF ADVERTISEMENTS, GIVEAWAYS,
PROMOTIONS TO GET YOUR BUSINESS
Market Structure
Imperfect or Monopolistic Competition
Many buyers and sellers
Products differentiated
Relatively free entry and exit
Each firm may have a tiny ‘monopoly’
because of the differentiation of their
product
Firm has some control over price
Examples – restaurants, professions –
solicitors, etc., building firms –
plasterers, plumbers, etc.
Oligopoly
WHERE FEW VERY LARGE SELLERS
DOMINATE THE INDUSTRY
ANY FIRM WITHIN THIS MARKET
STRUCTURE CAN CAUSE A CHANGE
IN OUTPUT, SALES, OR PRICES
A few control 2/3s of the
industry
Market Structure
Oligopoly – Competition amongst the
few
Industry dominated by small number of large
firms
Many firms may make up the industry
High barriers to entry
Products could be highly differentiated –
branding or homogenous
Non–price competition
Price stability within the market - kinked demand
curve?
Potential for collusion?
Abnormal profits
High degree of interdependence between firms
Market Structure
Examples of oligopolistic structures:
Supermarkets
Banking industry
Chemicals
Oil
Medicinal drugs
Broadcasting
Market Structure
Measuring Oligopoly:
Concentration ratio – the
proportion of market share
accounted for by top X number of
firms:
E.g. 5 firm concentration ratio of 80% -
means top 5 five firms account for 80%
of market share
3 firm CR of 72% - top 3 firms account
for 72% of market share
Market Structure
Duopoly:
Industry dominated by two large firms
Possibility of price leader emerging – rival will
follow price leaders pricing decisions
High barriers to entry
Abnormal profits likely
Must use Interdependent
Behavior
COLLUSION:
A formal agreement to set prices or limit output, acting as one
company.
PRICE WARS:
When one firm lowers prices other firms will follow in a series of price
cuts that result in unusually low prices
Monopoly The federal
MARKET STRUCTURE
government has
WITH ONLY
outlawed
1 SELLER OF A
monopolies for
PARTICULAR PRODUCT
over 100 years.
Trustbusting
T.R. and the
Sherman Anti-
Trust Act
started it off!
Natural
Monopoly
-A MARKET SITUATION WHERE COSTS OF PRODUCTION ARE
MINIMIZED BY HAVING A SINGLE FIRM PRODUCE THE PRODUCT
Geographic Monopoly
A MONOPOLY BASED ON
ABSENCE OF OTHER SELLERS
LUCK OF LOCATION!!!
Example: Thruway gas
stations!!
Technological
Monopoly
BASED ON THE OWNERSHIP OF A METHOD
OF PRODUCTION, SCIENTIFIC ADVANCE,
METHOD OR PROCESS
•Patents - granted by government, exclusive right to
manufacture, use, or sell any new and useful
Invention
•Copyrights - given to art or literary work and is
exclusive right of artist to publish, sell, or reproduce
for their lifetime plus 70 years
Government
Monopoly
GOVERNMENT OWNS AND OPERATES A MONOPOLY
AT NATIONAL, STATE AND LOCAL LEVELS
Market Structure
Monopoly:
Pure monopoly – industry is the firm!
Actual monopoly – where firm has >25% market
share
Natural Monopoly – high fixed costs – gas,
electricity, water, telecommunications, rail
Market Structure
Monopoly:
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
Market Structure
Advantages and disadvantages of
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
Market Structure
Disadvantages:
Exploitation of consumer – higher prices
Potential for supply to be limited - less choice
Potential for inefficiency –
X-inefficiency – complacency over
controls on costs
Market Structure
Monopsony
Single Buyer: The defining feature is the
presence of only one buyer in the
market.
Many Sellers: Typically, there are many
sellers, who are individually insignificant
and have limited bargaining power.
Price Control: The monopsonist can
influence the price of the good or service
by adjusting the quantity they purchase.
