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1 2 5 Conditions Number of sellers : Many/Several/One MARKET STRUCTURE Nature of Products: Homogenous/Heterogeneous (Differentiated) Ease of entry and exit: Easy/Restricted/Difficult Availability of market information: Perfect/Imperfect Influence in market price: Price taker / Price searcher 3 Perfect Competition Perfectly Competitive Market Is an ideal market structure in the eyes of the economists. In this market, consumers will enjoy the lowest possible price. But there is NO real-world example . 4 Features of a Perfectly Competitive Market Many sellers and buyers Individual sellers have no influence on the market Homogeneous goods Free entry and exit Perfect information 5 Can vegetable stalls be classified as operating in a perfectly competitive market? Q1. Many sellers and buyers? Yes Q2. Individual sellers have no influence on the market? No Q3. Homogeneous goods? No Q4. Free entry and exit? No Q5. Perfect information? No How about Stock Market? 6 Some behaviour of a perfectly competitive firm Under perfectly competitive market, sellers have to sell at a price according to that established in the market. They are the price taker. No individual seller engages in non-price competition such as advertising and package design. This is because the goods they sell are the same to the consumers. 7 Monopoly exists when there is only one seller that has no close substitute. 8 Features of a Monopoly There is no entry in a monopoly and there is only one producer in the market. 9 The goods or services sold by monopolist may be homogeneous or heterogeneous. 10 There is no perfect information in the market. Neither sellers nor consumers are fully aware of the cost, price, quality and quantity of the goods traded. Cost? Price? Quality? Quantity? 11 Can “Eastern Cross Harbour Tunnel” be classified as operating in a monopoly? Q1. No entry to the market and No there is only one producer? Q2. Services sold are homogeneous or heterogeneous? Yes Q.3 No perfect information? Yes How about water supplies in Hong Kong? 12 2 Prominent Behaviour of a Monopolist A monopolist faces the entire market demand, he can influence either the price or the quantity demanded but not both. If he lowers the price, he will sell more. If he raises the prices, the quantity demanded will drop ________________. Hence, he needs to search for or set a particular price that profits maximizes _______________. Thus a monopolist is a price searcher or a price setter. 13 Although monopolists do not face direct competition, they still need to compete with sellers selling close substitutes. Non-price competition like _________________ and quality improvement advertising is used. 14 15 Monopoly No entry to the market & there is only ONE producer 16 Group Discussion Draw lines to match the examples of monopolies in Column A with the ways by which their monopolies are formed in Column B. 1.The Mass Transit Railway (MTR) a. By government franchise 2.The First Bus Co. Ltd. b. By government ownership 3.The China Light & Power Ltd. c. By patent, copyright 4.The Peak Tram d. Limited market demand 5.Hello Kitty 6.The Hong Kong International Airport 7.The Tate’s Cairn Tunnel Co. Ltd. 8.The Water Supplies Department 9.The Organization of Petroleum e. Huge capital requirement and economies of scale f. Possession of superior raw materials g. By integration Exporting Countries (OPEC) 10. Yun Nan Bai Yao(雲南白藥) 17 Ways 1. By government franchise Description Examples •The government gives a •The Kowloon franchise to a firm to _____________ •Motor Bus Co. operate as the only producer Ltd. http://www. of a good. kmb.com.hk Royalties are paid to the 2. franchise. •The government owns the Common franchises in Hong Kong •The Hong Kong Government industry and other sellers are PostOffice Ownership not allowed to enter the industry. government for having the 18 3. By patent and •The producer has invented a new product and he •Plasma, has the e__________ xclusive right to use new product for a •Box Fan certain period. copyright opyrights give writers, composers and artist •C_________ xclusive rights over their ideas for certain period. e_______ 4. Limited market demand market demand and only Limited _________ one supplier in the local market can _____ satisfy the market demand. fully _________ ? Songs book •The Hong Kong Oxygen and Acetylene Co. Ltd. 5. The industry requires heavy capital investment. The firm needs to produce a huge output Huge capital conomies of to enjoy the benefits of e___________ requirement cale S______. As a result, and Economies of 1. scale •The Hong Kong Electric Holdings Ltd. its average cost of production is lower than the potential competitors. 2. its output may be very high and so it can satisfy the entire market demand. 19 6. •The firm possesses Possession of superior raw material superior raw materials. __________ 7. •Firms in the same industry •De Beers (controls the world’s finest diamond mines) By integration may combine together until finally only one firm remains. ? The Organization of Petroleum Exporting Countries (OPEC) 20 Oligopoly exists when there are several dominant sellers in the market is with only a few sellers Type of business Petroleum trade Radio e.g. Shell Caltex Mobil Esso is with several dominant sellers which take up a relatively large market shares Type of business Banking industry HKSB Bank of China Hang Seng Bank IDD services Cable & Wireless CTI Nets New T&T New World Tel. ? ? ? e.g. Travel agencies ? ? ? 21 Features of An Oligopoly A few sellers supply a majority of the total market supply. 22 Oligopolistic sellers are interdependent. They will consider their competitors’ responses in deciding their business policies. omogeneous or Goods sold can be h_____________ eterogeneous h______________. Entry into oligopolistic market is usually restricted or difficult. 23 Information is imperfect under oligopoly. Neither sellers nor consumers are fully rice q______ uality a_____ ost p____, ware of the c____, and q_______ uantity sold by different sellers. Cost? Price? Quality? Quantity? 24 Can “Mobile Phone Service” be classified as operating in an oligopoly? 25 Q.1 A few sellers supply a majority of the total market supply? Yes Q.2 Sellers are interdependent in deciding their business policies? Yes Q.3 Market information is imperfect? Q.4 Yes Goods sold are homogeneous or heterogeneous? Yes Q.5 Entry is restricted or difficult? Yes How about the petroleum trade? 26 Entry into oligopolistic market is usually restricted & difficult Funeral Parlour Petroleum Filling Station TV Station Fixed Telecommunication Services Network Travel Agency Fast food shop Newspaper Supermarket Which barrier(s) discourage(s) the new firms to enter the above markets? 27 28 BEHAVIOUR UNDER OLIGOPOLY 1. Oligopolists can influence the market. They are the price searchers. 29 2. Oligopolists are interdependent. If one seller lowers prices to attract more business, other sellers will follow. A price war will break out, and some sellers may go out of business. Pork $19Per Catty 10% discount for the elderly 30 $28 Trip to Shenzhen 31 3. Oligopolistic sellers often engage in nonprice competition such as free gifts to promote their product. 32 Monopolistic Competition exists when features of both perfect competition and monopoly are present. Features similar to PERFECT COMPETITION Features similar to MONOPOLY 1. There is a large number of sellers and buyers. 1. Monopolistic competitors sell heterogeneous product 2. Entry into the market is relatively easy. 2. Information is imperfect. 33 Can Taxi Service be classified as operating in a monopolistically competitive market? 34 1. 2. 3. 4. Large number of sellers? Easy to enter? (Relatively!) Sell heterogeneous product? Information is imperfect? Yes Yes Yes Yes How about restaurants? 35 Monopolistic Competition I. BEHAVIOUR The monopolistically competitive firms are price searchers. As they sell differentiated ____________ products, they can set a slightly higher price without losing their customers. They need to find the particular ___________ that maximises ___________. price profits Boutiques Hair salon Monopolistically competitive firms can also charge different prices even for the same product. 36 There are 2 reasons: First, services offered with the products may be different, e.g. high-quality service, professional advice. Second, market information about the price is imperfect. It seems impossible for customers to search every shop for the best price. 37 II. It is common for monopolistic competitors to engage in ompetition e.g. non-p_____ rice c__________, advertising, offering gifts and organising lucky draws. 38 Hong Kong Golden III. Firms under monopolistic competition are usually located in the same area in a district. There are 2 reasons : They can be easily known or The shops often try to found out by customers. differentiate their products It helps to reduce their or services, competition advertising costs. may not be so keen. 39 The Major Monopolies in Hong Kong Name of Company •The Kowloon Motor Bus Co., Ltd. •The Hong Kong Tramways Co., Ltd. •The New World First Bus Services Ltd. •The City Bus Co., Ltd. •The New World First Ferry Services Ltd. •Eastern Harbour Crossing •Western Harbour Crossing •Route 3 (Tai Lam Tunnel Section) •Tate’s Cairn Tunnel •The Kowloon-Canton Railway Corporation •Hongkong Post •Airport Authority •The Water Supplies Department •The China Light and Power Co., Ltd. •The Hong Kong Electric Holdings Ltd. •The Hong Kong and China Gas Co., Ltd. •Mass Transit Railway Corporation Ltd. Sources of Monopoly Power Government franchise Government ownership Government ownership, ownership of resources Huge capital requirement, economies of scale