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MARKET STRUCTURE


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DefinitionIn economics, market structure is

the number of firms producing

identical products which arehomogeneous.


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It also identifies how a market

is made up in terms of:The number of firms in the industryThe nature of the product producedThe degree of monopoly power each firm has

The degree to which the firm can influence price Profit levelsFirms behaviour pricing strategies, non-price

competition, output levelsThe extent of barriers to entryThe impact on efficiency


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Characteristics of each model: Number and size of firms that make upthe industry

Control over price or output Freedom of entry and exit from the industry

Nature of the product degree ofhomogeneity (similarity) of the products in theindustry (extent to which products can beregarded as substitutes for each other)

Diagrammatic representation the shape

of the demand curve, etc.


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Characteristics: Look at these everyday products

what type of market structure are the producersof these products operating in?

Remember tothink about thenature of the

product, entryand exit,behaviour ofthe firms,number andsize of the firmsin the industry.

You might evenhave to askwhat theindustry is??

Electric

Guitar

Jazz Body

Mercedes CLK Coupe

Vodka

Canon SLR Camera


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TYPES OF MARKET STUCTURE


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Perfect competition a theoretical market structure that features no barriers to entry, an unlimited

number of producers and consumers, and a perfectly elastic demand curve. .Examples of this model are stock market and agricultural industries.

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 outof 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

Demand CurveThe individual firm will view its demand as perfectly elastic. A perfectly elasticdemand curve is a horizontal line at the price. The demand curve for the industry isnot perfectly elastic, it only appears that way to the individual firms, since they musttake the market price no matter what quantity they produce. Therefore, the firmsdemand curve is a horizontal line at the market price.


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EXAMPLEThe following data represents a cost

function of a perfect competitive firm:TP or Q AFC AVC ATC MC

0

1 60 45 105 45

2 30 42.5 72.5 40

3 20 40 60 35

4 15 37.5 52.5 30

5 12 37 49 356 10 37.5 47.5 40

7 8.57 38.57 47.14 45

8 7.5 40.63 48.13 55

9 6.67 43.33 50 65

10 6 46.5 52.5 75

If the market price, P < 37; this firm's output Q = 0; firm'seconomic profit, EP = -60

If the market price, P > 37, this firm's output Q > 0; firms'economic profit , EP= TR - TC.

For example, when P = 65, Q = 9, EP = $65 x 9 - 50 X 9 =135


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By given the market demand at various price level, a market equilibrium pricecould be found.

TP or Q AFC AVC ATC MC

01 60 45 105 45

2 30 42.5 72.5 40

3 20 40 60 35

4 15 37.5 52.5 30

5 12 37 49 35

6 10 37.5 47.5 40

7 8.57 38.57 47.14 45

8 7.5 40.63 48.13 55

9 6.67 43.33 50 65

10 6 46.5 52.5 75

One firm's output level (column 2 in the above table) isobtained by comparing P and MC. Since all firms are

having the same cost function, the market output level is thesum of individual firms' output (column 4 in the above table).By comparing the market supply and market demand, we canfind the market equilibrium at:

P= 46 and Q = 10500

At this level, each firm is losing 8 dollars, indicating a

contraction in this industry. Some firms may leave in the longrun, causing the market supply to decrease and equilibriumprice will increase to the break-even level.

PRICE Qs (1 firm's output) PROFIT Qs(1500 firms in the market) / market supply Qd / market demand

26 0 -60 0 17000

32 0 -60 0 15000

38 5 -55 7500 13500

41 6 -39 9000 12000

46 7 -8 10500 10500

56 8 63 12000 9500

66 9 144 13500 8000

(assuming identical cost function for all firms)


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Monopoly

where there is only one provider of a product or service.Examplesare public utilities and professional sports leagues. Characteristics

1. A single seller: the firm and industry are synonymous.2. Unique product: no close substitutes for the firms

product.3. The firm is the price maker: the firm has considerable

control over the price because it can control the quantity supplied.4. Entry or exit is blocked. Demand CurveMonopoly demand is the industry or market demand and is thereforedownward sloping. Price will exceed marginal revenue because themonopolist must lower price to boost sales and cannot pricediscriminate in most cases. The added revenue will be the price of the

last unit less the sum of the price cuts which must be taken on all priorunits of output. The marginal revenue curve is below the demandcurve.


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ExampleIn this example, the cost function is the same asthe one used in the perfect competition example.You can see from the following analysis that the

output level and market price are different inmonopoly . The output level is lower than outputof the perfect competitive firm; and price is higherthan the price of perfect competitive firm.

TP or Q AFC AVC ATC MC

0

1 60 45 105 45

2 30 42.5 72.5 403 20 40 60 35

4 15 37.5 52.5 30

5 12 37 49 35

6 10 37.5 47.5 40

7 8.57 38.57 47.14 45

8 7.5 40.63 48.13 55

9 6.67 43.33 50 6510 6 46.5 52.5 75

Pd Qd TR MR EP

115 0 0 0

100 1 100 100 -5

83 2 166 66 21

71 3 213 47 3363 4 252 39 42

55 5 275 23 30

48 6 288 13 3

42 7 294 6 -35.98

37 8 296 2 -89.04

33 9 297 1 -153

29 10 290 -7 -235

By comparing the MR and MC unit by unit, we can find this

firm's output at:

Q = 4, and P= 63. This is the profit maximization output

level, with EP = 42.

It is possible for this firm to continue earning this profit in

the long run as there are no competition in the market.


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Monopolistic Competition competition refers to a market situation with a relatively large number ofsellers offering similar but not identical products. Examples are fast food

restaurants and clothing stores. Characteristics

1. A lot of firms: each has a small percentage of the total market.

2. Differentiated products: variety of the product makes this modeldifferent from pure competition model. Product differentiated in style, brandname, location, advertisement, packaging, pricing strategies, etc.

3. Easy entry or exit. Demand CurveThe firms demand curve is highly elastic, but not perfectly elastic. It is moreelastic than the monopolys demand curve because the seller has many rivalsproducing close substitutes; it is less elastic than pure competition, becausethe sellers product is differentiated from its rivals.


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Oligopoly Competition between the few

May be a large number of firms in the industry but the industry isdominatedby a small number of very large producers. Example music sales.

Characteristics1. Few large firms: each must consider its rivals reactions in

response to its decisions about prices, output, and advertising.2. Standardized or differentiated products.3. Entry is hard: economies of scale, huge capital investment

may be the barriers to enter. Demand CurveFacing competition or in tacit collusion, oligopolies believe that rivals willmatch any price cuts and not follow their price rise. Firms view theirdemands as inelastic for price cuts, and elastic for price rise. Firms facekinked demand curves. This analysis explains the fact that prices tendto be inflexible in some oligopolistic industries.


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Example The music industryhas a 5-firm

concentration ratioof 75%.Independents makeup 25% of themarket but therecould be many

thousands of firmsthat make up thisindependentsgroup. Anoligopolistic marketstructure thereforemay have manyfirms in the industrybut it is dominatedby a few largesellers.

o Music sales


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Monopsony market form in which only one buyer faces many sellers. Example is the health

care companies. Characteristics

Single Buyer: First and foremost, a monopsony is a monopsony becauseit is the only buyer in the market. The word monopsony actually translatesas "one buyer." As the only buyer, a monopsony controls the demand-side

of the market completely. If anyone wants to sell the good, they must sell tothe monopoly. No Alternatives: A monopsony achieves single-buyer status because

sellers have no alternative buyers for their goods. This is the keycharacteristics that usually prevents monopsony from existing in the realworld in its pure, ideal form. Sellers almost always have alternatives.

Barriers to Entry: A monopsony often acquires and generally maintainssingle buyer status due to restrictions on the entry of other buyers into themarket. The key barriers to entry are much the same as those that exist formonopoly: (1) government license or franchise, (2) resource ownership, (3)patents and copyrights, (4) high start-up cost, and (5) decreasing averagetotal cost.


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Oligopsony a market form in which the number of buyers is small while thenumber of sellers in theory could be large. Example is the

cigarette companies. Characteristics Small Number of Large Buyers: An oligopsony market is

dominated by a small number of large buyers, each of which is

relatively large compared to the overall size of the market. Thisgenerates substantial market control, the extent of market controldepending on the number and size of the buyers.

Few Alternatives: An oligopsony arises because sellers have fewalternatives available for the goods they sell. While alternativebuyers might exist, they tend to be less desirable.

Barriers to Entry: Firms in a oligopsony market attain and retainmarket control through barriers to entry. The most commonbarriers to entry include patents, resource ownership, governmentfranchises, start-up cost, brand name recognition, and decreasingaverage costs. Each of these make it extremely difficult, if notimpossible, for potential competitors to enter the market.


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SUMMARYMarket Structure Seller Entry

Barriers Seller NumberBuyer Entry

Barriers Buyer Number

Perfect Competition No Many No Many

Monopolistic

competition No Many No Many

Oligopoly Yes Few No ManyOligopsony No Many Yes FewMonopoly Yes One No ManyMonopsony No Many Yes One

one fewsellers monopoly oligopolybuyers monopsony oligopsony
http://en.wikipedia.org/wiki/Perfect_Competitionhttp://en.wikipedia.org/wiki/Monopolistic_competitionhttp://en.wikipedia.org/wiki/Monopolistic_competitionhttp://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Oligopsonyhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Monopsonyhttp://en.wikipedia.org/wiki/Monopsonyhttp://en.wikipedia.org/wiki/Monopolyhttp://en.wikipedia.org/wiki/Oligopsonyhttp://en.wikipedia.org/wiki/Oligopolyhttp://en.wikipedia.org/wiki/Monopolistic_competitionhttp://en.wikipedia.org/wiki/Monopolistic_competitionhttp://en.wikipedia.org/wiki/Perfect_Competition

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