Market structure
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The document discusses different types of market structures: 1) Monopolistic competition is characterized by many firms producing similar but differentiated products that are not perfect substitutes for one another. Firms compete by differentiating their products and set prices taking competitors' prices as given. 2) Perfect competition exists when many small firms produce identical products and are price takers. There are no barriers to entry or exit. 3) Monopoly is dominated by a single seller of a unique product without close substitutes. Monopolists can influence market prices. 4) Oligopoly has a small number of interdependent firms that recognize how each other's actions impact prices and market shares.
Market structure
- 2. In economics, market structure is the number of firms producing identical products which are homogeneous. such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market
- 3. Things can be considered: Number and size of sellers and buyers Type of the product Conditions of entry and exit Transparency of information
- 4. Types of market structures Monopolistic competition • Perfect competition Oligopoly Monopoly • Natural Monopoly
- 5. Monopolistic competition a type of imperfect competition such that many producers sell products or services that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.
- 6. Monopolistic competition Multiple firms produce similar products Firms face down sloping demand curves Profit maximization occurs where MC=MR In the limit, firms compete away economic profits
- 7. In monopolistic competition, an industry contains many competing firms, each of which has a similar but at least slightly different product. Restaurants, for example, all serve food but of different types and in different locations. Production costs are above what could be achieved if all the firms sold identical products, but consumers benefit from the variety.
- 8. Are these milk different?
- 9. Perfect Competition In economic theory, perfect competition (sometimes called pure competition) describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, Example: Agriculture Products
- 10. The theoretical Perfect Competition situation in which the following conditions are met: (1) buyers and sellers are too numerous and too small to have any degree of individual control over prices, (2) all buyers and sellers seek to maximize their profit (income), (3) buyers and seller can freely enter or leave the market, (4) all buyers and sellers have access to information regarding availability, prices, and quality of goods being traded, and (5) all goods of a particular nature are homogeneous, hence substitutable for one another.
- 11. Basic Importance of Perfect Competition A large number buyers and sellers A large number of consumers with the willingness and ability to buy the product at a certain price, and a large number of producers with the willingness and ability to supply the product at a certain price No barriers of entry and exit No entry and exit barriers makes it extremely easy to enter or exit a perfectly competitive market. Perfect factor mobility In the long run factors of production are perfectly mobile, allowing free long term adjustments to changing market conditions. Zero transaction costs Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
- 12. Property rights Well defined property rights determine what may be sold, as well as what rights are conferred on the buyer. No externalities Costs or benefits of an activity do not affect third parties. Homogeneous products The products are perfect substitutes for each other, (the qualities and characteristics of a market good or service do not vary between different suppliers). Rational buyers Buyers are capable of making rational purchases based on information given.
- 14. Monopoly
- 15. From the (Greek word monos “Alone” or “Single” and polein “To sell”) • Exist when a specific person or enterprise is the only supplier of a particular commodity. • On the other hand, it is a marker structure in which there is only one producer/seller for a product.
- 16. Characteristics • Profit Maximizer – Maximizes profit • Price Market – Decides the price of the good to be sold • High Barriers – Other sellers are unable to enter the market of the monopoly. • Single Seller – In a monopoly, there is one seller of the good that produces all the output • Price Discrimination – A monopolist can change the price and quality of the product
- 17. Source of Monopoly Power Monopolies derive their market power from barriers to enter- circumstances that prevent a greatly impede a potential competitor’s ability to compete in a market. • Economic Barriers – Economic barrier include economics of scale, capital requirements, cost of advantages and technological superiority. • Economies of Scale – Monopolies are characterized by decreasing costs for a relatively large range of production. • Capital Requirement – Production processes that require large investment of capital. • Technological Superiority – A monopoly may be better able to require integrate and use the best possible technology in producing its goods.
- 18. • No Substitutes Goods – A monopoly sells a good for which there is no close substitute. • Control of Natural Resources – A prime source of monopoly power is the control or resources that are critical to the production of a final good. • Network Externalities – The use of product by a person can affect the value of that product to other people. • Legal Barriers – Legal rights can provide opportunity to monopolise the market of a good. • Deliberate Actions – A company wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competetion.
- 19. Oligopoly
- 20. From (Greek words oligos means “Few” and polein “to sell”) • Is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). • Oligopolists can result from various forms of collusion which reduce competition and lead to higher prices for consumer's. Oligopoly has its own market structure. • An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that many small firms may also operate in the market.
- 21. Characteristics • Profit maximization conditions – An oligopoly maximizes profits. • Ability to set price – Oligopolies are price setters rather than price takers • Entry and exit – Barriers to entry are high. The most important barriers are government licenses, economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. • Number of firms"Few" – a "handful" of sellers.There are so few firms that the actions of one firm can influence the actions of the other firms. • Long run profits - Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits. • Product differentiation - Product may be homogeneous (steel) or differentiated (automobiles).
- 22. • Perfect knowledge - Assumptions about perfect knowledge vary but the knowledge of various economic factors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality. • Non-Price Competition - Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition.