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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 Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-2 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.) Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-3 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.) Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-5 Perfect Competition (cont.) Market P Individual firm (price taker) P Ep Ep Eq Q Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 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.) Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-7 Monopoly (cont.) • Firm is a ‘price maker’ as it controls the total quantity supplied P D Q (cont.) Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-8 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.) Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-9 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 Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-10 Monopolistic Competition • A large number of firms producing close, but not identical substitutes P D Q (cont.) Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-11 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 5-12 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.) Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-13 Monopolistic Competition (cont.) • Imperfect mobility of resources • Imperfect knowledge • Examples in Australia: – – – Clothing and footwear industries Furniture industry Cafes, restaurants Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-14 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.) Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-15 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 5-16 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) Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 5-18 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 5-19