Market Structure
Market Structure
Market structure – identifies how a market is made up in terms of:
The number of firms in the industry The nature of the product produced The degree of monopoly power each firm has The degree to which the firm can influence price Profit levels Firms’ behavior Firms’ behavior – pricing strategies, non-price competition, output levels The extent of barriers to entry The impact on efficiency
Market Structure Perfect Competition
Pure Monopoly
More competitive (fewer imperfections)
Market Structure Perfect Competition
Pure Monopoly
Less competitive (greater degree of imperfection)
Market Structure Pure Monopoly
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly
The further right on the scale, the greater the degree of monopoly power exercised by the firm.
Market Structure
Importance: Degree of competition affects the consumer – will it benefit the consumer or not? Impacts on the performance and behavior behavior of the company/c company/compani ompanies es involved involved
Market Structure
Characteristics of each model: Number and size of firms that make up the industry Control over price or output Freedom of entry and exit from the industry Nature of the product – degree of similarity of the products in the industry (extent to which products can be regarded as substitutes for each other)
Market Structure Characteristics: Look at these everyday products – what type of market structure are the producers of these products operating in?
Mercedes CLK Coupe
Remember to think about the nature of the product, entry and exit, behavior of the firms, number and size of the firms in the industry.
Canon SLR Camera Bananas
You might even have to ask what the industry is??
Electric Guitar – Jazz Body Vodka
Perfect Competition
One extreme of the market structure spectrum Characteristics:
Large number of firms Products are 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
Monopolistic or Imperfect Competition
Characteristics:
Large number of firms in the industry May have some element of control over price due to the fact that they are able to differentiatee their product differentiat in some way from their rivals – products are therefore close, but not perfect, substitute substitutess Entry and exit from the industry is relatively easy – few barriers to entry and exit Consumer and producer knowledge imperfect
Oligopoly
Competition between the few
May be a large number of firms in the industry but the industry is dominated by a small number of very large producers
Concentration Ratio – the proportion of total market sales (share) held by the top 3,4,5, etc firms:
A 4 firm concentration ratio of 75% 75% means the top 4 firms account for 75% of all the sales in the industry
Oligopoly
Music sales – The music industry has a 5-firm concentration ratio of 75%. Independent Independents s make up 25% of the market but there could be many thousands of firms that make up this ‘independents’ group. An oligopolistic market structure therefore may have many firms in the industry but it is dominated by a few large sellers. Market Share of the Music Industry 2010 IFPI: http://www.ifpi.org/site-content/press/20030909.html
Oligopoly
Features of an oligopolistic market structure: Price may be relatively stable across the industry Potential for collusion or conspiracy Behav Behavior ior of firms affected affected by by what they believe believe their their rivals might do – interdependence of firms Goods could be identical or highly differentiated Branding and brand loyalty may be a potent source of competitive advantage Non-price competition may be prevalent Game theory can be used to explain some behavior High barriers to entry
Monopoly Pure monopoly – where only one producer exists in the industry In reality, rarely exists – usually some form of substitute available! Firms may be investigated for examples of monopoly power when market share exceeds 25% Use term ‘monopoly power’ with care!
Monopoly
Monopoly power – refers to cases where firms influence the market in some way through their behavior – 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 maximization – encourages unwanted entrants to the market Sometimes seen as a cause of market failure
Monopoly
Origins of monopoly:
Through growth of the firm Through uniting, merger or takeover Through acquiring patent or license
Monopoly
Summary of characteristics of firms exercising monopoly power:
Price – could be deemed too high, may be set to destroy competition (destroyer or predatory pricing), price discrimination discriminat ion possible. Efficiency – Efficiency – could be inefficient due to lack of competition (Xinefficiency) or…
could be higher due to availability of high profits
could be be high high becau because se Innovation - could of the promise of high profits, Possibly encourages high investment in research and development (R&D) Collusion – possible possible to maintain monopoly power of key firms in industry High levels of branding, advertising and non-price competition
TYPE OF MARKET STRUCTURE
Product
No . o f sellers
No. of buyers
Barriers to en entr try y of exit from the industry
Relative Relati ve inf influe luence nce over r the price of the product
Pure Competition
Homogenous
Many
Many
None
Little or no influence; price takers
Monopoly
Unique
One
Many
Very high
Absolute influence; seller is price maker
Monopolistic Competition
Slightly differentiated
Many
Many
Low
Strong influence; but usually a price taker
Oligopoly
Slightly differentiated
Few
Many
Very high
Very strong influence; usually a price maker with the others
Monopsony
Usually unique
Few
One
Very high
Absolute influence; buyer is price maker
Oligopsony
Slightly differentiated
Few to many
Few
Very high
Very strong influence buyer; usually a price maker with the others
RA 7394 :The Consumer’s Consumer’s Act of the Philippines is the policy of the state to protect the interest of the consumer, promote his general welfare and to establish standards of conduct for business industry.
1. The right to basic needs, which guarantee survival, survival, adequate food, clothing, shelter, health care. Education and sanitation to health and life.
2. The right to safety, which is the right to be protected against the marketing of goods or the provision of services that are hazardous to health and life.
3. The right to information, which is the right to be protected against dishonest misleading advertising or labelling and the right to be given the facts and information needed to make an informed choice.
4. The right to choose, which is the right to choose products at competitive prices with an assurance of satisfactory quality
5. The right to representation, which is the right to express consumer’s interests in making and execution of government price policies. 6. The right to redress, which is the right to be compensated for misrepresentation, shoddy goods or unsatisfactory services.
7. The right to consumer education, which is the right to acquire the knowledge and skills necessary to be an informed customer.
8. The right to a healthy environment, which is the right to live and work in an environment that is neither threatening nor dangerous and, permits a life of dignity and well being.
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