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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