Download Chapter 5 - McGraw Hill Higher Education

PART 3
MARKET STRUCTURES
Chapter 5
Market structures and the Australian
capitalist economy
Monopoly
Oligopoly
Monopolistic
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
5-1
Lecture Plan
Types of market structures:
• Perfect competition
• Monopoly
• Monopolistic competition
• Oligopoly
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Market Structures
• In capitalist economic systems, decision making
(concerning production and distribution) occurs
through the market
• A market is the interaction of:
–
–
Supply (sellers willing to exchange goods for payment at a
profit) and
Demand (consumers who exchange money for goods to
increase utility)
(cont.)
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Market Structures (cont.)
• Markets may be classified into different structures
according to the degree of competition that exists
• This is determined mainly by the number, size and
behaviour of firms
Degree of competition
Perfect
competition
Monopolistic
competition
Oligopoly
Monopoly
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
5-4
Perfect Competition
• Mainly a theoretical model, close examples: fruit and
vegetable markets, stock exchange
• Characteristics are:
–
Many buyers and sellers (each relatively small)
– Homogeneous product (identical)
– Perfect knowledge
•
•
•
•
Perfect mobility of firm and resources they employ
No barriers to (freedom of) entry or exit of the market
Absence of non-price competition
Firms are ‘price takers’—individual firms have no
influence over market price, as they each produce
such a small fraction of the total supply
(cont.)
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Perfect Competition (cont.)
Market
P
Individual firm
(price taker)
P
Ep
Ep
Eq
Q
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D
Q
5-6
Monopoly
• Imperfect competition
• One seller (opposite extreme to perfect
competition)
• One product (with no close substitutes)
• Consumers are forced ‘to take it or leave it’
(cont.)
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Monopoly (cont.)
• Firm is a ‘price maker’ as it controls the total
quantity supplied
P
D
Q
(cont.)
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Monopoly (cont.)
• Barriers to entry (which reduce the ability of new
firms to enter the market and compete)
• They may be due to:
–
–
–
–
–
–
Massive financial (establishment) costs
Little or no access to raw materials
Existing firms being protected by legislation
Existing firms owning exclusive rights
The size of the market (e.g. markets are not big enough
to support more than one firm)
Minimal advertising expenditure
(cont.)
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Monopoly (cont.)
• Examples in Australia
–
–
Sugar refining (CSR)
Postal services (Australia Post)
• Previously, federal or state governments had
monopolies in areas such as:
–
–
–
–
–
Telecommunications (Telecom/Telstra)
Gas
Electricity
Water supply
Public transport
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Monopolistic Competition
• A large number of firms producing close, but not
identical substitutes
P
D
Q
(cont.)
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Monopolistic Competition (cont.)
• Firms use PRODUCT DIFFERENTIATION to
distinguish themselves from other competitors e.g.
physical differences in the product, differences in
location, packaging etc.
• I.e. heterogeneous products (differentiated)
• Relatively large numbers of sellers creates
competition, while product differentiation causes a
degree of monopoly power
(cont.)
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Monopolistic Competition (cont.)
• Limited price control (is dependent on the degree of
product differentiation as each firm produces a fairly
small share of the total output)
• Non-price competition e.g. product quality
• Relatively small barriers to entry e.g. securing a
share of the market through advertising may be
necessary
(cont.)
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Monopolistic Competition (cont.)
• Imperfect mobility of resources
• Imperfect knowledge
• Examples in Australia:
–
–
–
Clothing and footwear industries
Furniture industry
Cafes, restaurants
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Oligopoly
• A few sellers (3 to 6) dominate the market
• Products are close substitutes e.g. branded petrol
• A degree of control over price:
–
–
Firms are ‘price makers’—as each supplies a large portion
of the total industry output
No frequent or significant price changes as it can lead to
price wars
(cont.)
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Oligopoly (cont.)
• Potential for collusion—where all firms either
increase or decrease their prices as a group
• These agreements allow the firms to exert control
over the price like a monopolist
• Note: A type of collusion involving a formal
agreement about price and production is the cartel
e.g. OPEC
(cont.)
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Oligopoly (cont.)
• Significant non-price competition
–
Via product differentiation, advertising, restrictive trade
practices
• Difficult market entry
–
–
–
Need for substantial financial backing
Ownership of raw materials or patents
Economies of scale for the existing firms
(cont.)
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
5-17
Oligopoly (cont.)
Examples in Australia:
–
–
–
–
–
Banking
Brewing
Cigarettes
Car industries
Mobile phones (e.g. Telstra, Optus, Vodafone, Virgin
Mobile, Orange)
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PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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Summary
Type of
market
Product details
Perfect
Competition
• Homogenous
• Perfect
substitutes
Monopolistic
Competition
Oligopoly
Monopoly
Features
• Many firms
• Price takers
• Freedom of entry
• Product
differentiation
• Many firms,
• advertising to establish
brand preference
• ease of entry
• Close substitutes • 3–6 firms
• Some price control
• Single product,
• Single producer
no substitutes
• Complete control over
price
Copyright  2005 McGraw-Hill Australia Pty Ltd
PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser
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