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Transcript
PART 4: MARKET STRUCTURES A. Market situations Perfect Compe tition Imperfect Competition Monopolistic Competetion Many sellers Many buyers Homogeneous product ie. identical products Price taker ie. they accept the market price and adjust output to maximise profits No barriers to entry of other firms Perfect knowledge ie. all buyers know price + all sellers know prices of input and about technology Large number small firms Close substitutes but producers differentiate product ie. make product appear different to competitors Limited control over price ie. they face a downward sloping D c urve Weak barriers to entry of other firms Duopoly Oligopoly A few sellers Close substitutes so differentiate products Price maker Face kinked demand curve so strong use of non price competition Control over quantity sold Strong b arriers to entry of other firms Two sellers Close substitutes so differentiate products Price maker Face kinked demand curve so strong use of non price competition Control over quantity sold Strong barriers to entry of other firms Monopoly One seller A single product with no suitable substitutes Price maker Control over quantity sold Strong barriers to entry of other firms Monopsony One buyer of a commodity or service Equivalent of monopoly onthe buying side Task Add to the diagram above by giving a NZ example of each market type 1. PERFECT COMPETITION In perfect competition neither the buyer nor the seller can influence the market price No individual firm produces in large enough quantities to affect the market price so they are PRICE – TAKERS. Firms which operate in this market are typically small in size and exist in large numbers LRAC turns up at low levels of output eg. market gardeners Another condition of perfect competition is homogeneous products. the products of all firms must be identical. However, market gardeners may package and advertise their products in such a way that buyers think they are different. If this happens they are NOT perfect competitors Further conditions of perfect competition are - free entry to the industry - anyone who wants to set up a business can - perfect knowledge – both buyers and sellers have all the information necessary to allow them to make perfect decisions Important Definitions Perfect Competition = Perfect competition exists in a market where there are many small sellers all producing homogeneous products, with no barriers to entry and each receiving perfect information Because each seller sells such a small portion of the total quantity each has no influence on price ie. they are price takers. Monopoly = There is only one seller in this type of market, there are no close substitutes and sellers have massive control over price or quantity. There are major barriers to entry AS 90629 (3.1) Part 4 Different market structures - p30 Oligopoly = Oligopoly is where there are only a few large firms As we will see in topic 4 perfect competition is allocatively that control the market. efficient so it is important to economists as it used as the They produce a bench mark to compare real world market structures are differentiated product, and judged against have some control over the price. There are strong 2. MONOPOLISTIC COMPETITION barriers to entry This market structure is characterised by large numbers of Duopoly = firms selling commodities that are close substitutes but are differentiated and there are weak barriers to the entry of new Duopoly is where there are only two sellers in the firms. market. They differentiate There are many examples of monopolistic competition eg.retail their product with heavy firms like dairies, hairdressers etc.and service firms like advertising and service. plumbers and electricians.etc. You could say these firms sell There are major barriers to the same products but they sell from different locations and entry, and because the provide different qualities of service making seemingly market is dominated by identical products differentiated these two firms, they face inelastic demand Even though they are competing with a number of similar sellers they don’t sell at one big market place (like an auction Monopolistic competition= setting the price) so they limited control over price and can Monopolistic competition charge different prices but they have to careful not to price exists in a market where their product too highly as the consumer has lots of substitutes there are a large number of to choose from producers, selling well differentiated products. 3. OLIGOPOLY AND DUOPOLY They have a small level of These market structure are very similar. Duopoly has 2 firms control over price or (like Lion Nathan and Dominion Breweries) where Oligopoly output, and they face has a few firms (like the banking and petrol / oil sectors. They relatively inelastic demand. each produce similar but differentiated products and there There are few barriers to are strong barriers to entry of other firms – in particular entry. technological barriers and high capital costs of entry Obviously no firms operate in markets that meet all these criteria so there are none that are truly perfect competitors THE KINKED DEMAND CURVE The kinked curve explains why these firms avoid price competition No individual oligopoly or duopoly will raise the price as consumers will switch to other firms, causing a big fall in their market share (loss of sales and profits) Lowering the price also results in lost revenue as other firms must lower their price too or lose their market share. while sales may increase (due to lower price) market share changes very little BUT all firms are now selling at lower prices and so the price cut reduces their profits Price Demand curve for individual duopoly or oligopoly Relatively elastic demand Current Market Price Instead of price competition these firms prefer price collusion (although if caught they will be prosecuted by the Commerce Commission) and use non-price marketing to increase their market share. AS 90629 (3.1) Part 4 Different market structures - p31 Relatively inelastic demand D Output ie. they use lots of advertising focusing on brand names, logos etc to build company recognition and they use schemes like Fly Buys, air-points, sponsorship to build customer loyalty 4. MONOPOLY Monopoly involves just one seller of a good or service. This means that a monopolist has a high degree of control over price. Note this doesn’t give them absolute power to push prices up and up as consumers can choose not to buy the product. Not all monopolies are found in large scale industry. Many smaller settlements have only one doctor, dentist or lawyer – they can set their own fees as consumers if dissatisfied may have to travel long distances to find a substitute A key reason for the power monopolists have in markets is that they are able to keep possible competitors out of their industry ie. there are strong barriers to entry BARRIERS TO ENTRY There are some well recognised barriers to other firms a. The capital cost of entering an industry In NZ it would be enormously expensive for a private company to lay duplicate sets of rails even just between Auckland and Wellington to compete with Tranz Rail Ltd. When capital costs are high a firm can only be competitive if it produces (and sells) large quantities enabling the fixed costs to be spread and so lowering the average costs of products. In these cases existing monopolies have an advantage as they can simply expand production to lower their per unit costs and so undercut any new firm that tries to enter this market Note this situation is called Natural Monopoly and is discussed in detail below and is assessed in EAS 3.3 b. Technological expertise In this case a firm may have some special knowledge that keeps it well ahead of competitors eg. In NZ we have lots of expertise in Americas Cup boat building that gives our boat builders an advantage c. Cost of transport / protection Where goods the only competition comes from firms in different locations the cost of transportation gives protection Note tariffs or customs duties are used to raise the price of overseas goods and so protect local firms from competition d. Legal barriers Patents protect other firms from copying their products. Note patents only last for a limited period e. Control over resources When a business owns a resource in a region it has an obvious advantage over other producers who wish to enter the market. 5. MONOPSONY Is the sole buyer in a market and is most likely to be seen in the market for resources where a large firm may be the sole buyer of factor inputs eg. in the forestry sector a timber mill may be the only buyer of logs in a region AS 90629 (3.1) Part 4 Different market structures - p32 B. Market Strategies Task Imperfect competitors use marketing strategies to increase their sales or market share to increase profits. Explain why perfect competitors don’t use either price or non-price competition Any promotion which involves dropping the price to attract customers is called price competition. Examples include Price competition : Use of discounts Sales Interest free Loss leaders (ie. line of goods sold deliberately priced below cost to act as a drawcard for customers – eg. supermarkets using soft drinks as loss leaders) Many imperfect firms are reluctant to use price competition as it may lead to retaliation by competitors (ie. price wars – eg. QANTAS /Air NZ, fast food outlets and super-markets ) and instead they favour non-price marketing strategies No price competition because if they raise price consumers with perfect knowledge simply buy off competitors They wont lower the price because price will be < AC and so they will earn sub-normal profits Non- price competition : Not possible as products are homogeneous and so product difference don’t exist and so no basis for differentiation Non– Price Competition Product differentiation Product Variation Creating imagined differences in a product Creating real changes to a product Location Sponsorship Branding Packaging Loyalty Schemes Product Modification Service Non price advertising AS 90629 (3.1) Part 4 Different market structures - p33 Vertical Product Variation 1. PRODUCT VARIATION This can be achieved by modifications e.g. adding air bags to a car, or by running vertical product variation e.g. Mitsubishi has a range of cars from Lancer at the budget range to Shogun at the luxury 4x4 range. Important Definitions Product variation = Product Variation includes getting consumers to buy a good or service by giving it real variations to make it different and superior to the competition 2. PRODUCT DIFFERENTIATION This can be achieved by: Product differentiation = Location e.g. being in a popular mall, having easy access and parking Product Differentiation involves getting customers to buy a good or service by making it appear different and superior to the competition Packaging e.g. more attractive / useful packaging Branding e.g. a brand name or logo encourages consumer loyalty (Coke) Service e.g. petrol stations with petrol pump attendants as opposed to self serve. Sponsorship e.g. firms may try to link themselves with a popular event or activity like the Vodafone Warriors. Loyalty schemes ie. competitions encourage consumers to come back to the same firm eg Air NZ air-points Non-price advertising ie advertising aims at attracting the attention by using that appeals to their target market eg music or sex appeal for younger audience. or using Stacy Jones to attract league supporters Task Show the effect of a non-price marketing on the graph below Heineken Heineken S S P D1 DD Q Q1 AS 90629 (3.1) Part 4 Different market structures - p34 C. Advantages / disadvantages of non price competition PRODUCERS Advantages For Producers: The producer can use successful non-price competition (e.g. sponsorship of Rugby World Cup) to shift the demand curve for their product to the right, thus increasing price, quantity sold and so profit. Heineken Heineken S1 S P1 D1 = effect of successful advertising encouraging rugby supporters to consume Heinekin P* S1 = effect of higher costs of non price marketing eg. extra advertising, sponsoring events etc Successful since extra costs covered by greater sales at the higher prices D1 D D 1 Q Disadvantages for Producers Product Differentiation: Can lead to increased selling costs. Product Variation: Can lead to increased average costs because producers will no longer enjoy economies of scale on large runs of similar product. Task Show the effect of a successful non-price marketing on the graph above CONSUMERS Advantages for Consumers With product variation greater range with extra features. Disadvantages for Consumers Consumers will pay higher prices due to lack of economies of scale involved in variation and increased selling costs of differentiation. Resource wastage due to excessive packaging AS 90629 (3.1) Part 4 Different market structures - p35 Summary Task Complete the table below Market Structure New Zealand Example Example of a non price marketing strategy used Perfect Competition Kiwifruit market (growers) Raw milk solids market (on supply side (ie. dairy farmers) Fruit and vege market (ie. market gardeners) eg. market gardeners that can use LOCATION to increase sales by using roadside stalls Monopolistic competition Hair styling market Internet cafe market Foreign student education market eg. hair saloons use SERVICE as method to increase sales by advertising no need to book(suggesting quick service) Oligopoly New car market (Ford Mitsubishi, Honda, Toyota) Petrol wholesale market (Shell, BP, Caltex, Mobil) Retail banking market (Westpac, BNZ, ANZ, Kiwibank) eg. service stations DIFFERENTIATE product by offering speed wash, executive wash etc and so do car manufacturers by offering different models Duopoly Telephone toll market (Telecom, TelstraClear) Wholesale beer market (Dominion breweries, Lion Nathan) Cola drink market (Coca cola, Pepsi) eg. breweries use SPONSORSHIP to increase sales by linking to popular teams such as KIWI Rugby League team and Lion Red Monopoly Kaikoura whale watching (Whale watch Kaikoura) Postal delivery market (NZ Post) Work related insurance market (ACC – accident compensation corporation) eg. Kaikoura whale watch uses NON PRICE ADVERTISING to increase sales by linking whale watching to NZ’s ‘clean green” environmentally conscientious image Monopsony The market for raw milk solids (demand side – Fonterra) The Chch market for Casino workers (Chch Casino) The NZ based professional rugby players market (NZ Rugby Union) eg. NZ Rugby Union uses BRANDING to attract players ie. eligible to become ALL BLACK AS 90629 (3.1) Part 4 Different market structures - p36