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UNIT 7
MARKET STRUCTURE
MARKET STRUCTURE
Market structure is best defined as the
organizational and other characteristics of a
market. Traditionally, the most important
features of market structure are:
The number of firms
The market share of the largest firms
The nature of costs
The degree to which the industry is vertically
integrated
The extent of product differentiation
The turnover of customers
TYPES OF MARKET
STRUCTURE
PERFECT COMPETITION
MONOPOLISTIC COMPETITION
MONOPOLY
OLIGOPOLY
THESE MARKET STRUCTURES ARE DIFFERENT IN TERMS OF
THEIR CHARACTERISTICS.
CHARACTERISTICS OF
PERFECT COMPETITION
• MANY PARTICIPANTS
• HOMOGENOUS PRODUCTS
• NO BARRIERS TO ENTRY
• EACH FIRM IS A PRICE TAKER {Passive}
• HIGH ECONOMIC EFFICIENCY
• WEAK INNOVATIVE BEHAVIOUR
PERFECT COMPETITIVE FIRMS
MAKING PROFITS IN THE SR & LOSSES
IN THE LR
• A higher price
creates a profit
opportunity in sector
Y.
• Simultaneously, lower
prices result in losses
in industry X.
MONOPOLY
• This is a market in which there is only one
supplier of the goods or services, many
purchasers and there are no close
substitutes.
• Example NWC is a monopoly where pipe
water is concern.
CHARACTERISTICS OF A
MONOPOLY FIRM
• One supplier and many buyers
• Firm is a price maker
• A monopoly firm faced a known demand
curve
• Large barriers to entry and exit
The Monopolist’s ProfitMaximizing Price and Output
• The profit-maximizing level of
output (Qm) occurs where MR =
MC.
• Notice that the outcome is
different from that of perfect
competition. Here, the price
($4.00) is less than the marginal
cost ($1.50), and the monopolist
earns positive economic profit.
Monopoly in the Long and ShortRun
• It is possible for a profit-maximizing monopolist to
suffer short-run losses and go out of business in the
long-run.
Marginal Revenue and Market Demand
• At every level of
output except one
unit, a monopolist’s
marginal revenue is
below price.
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Marginal Revenue and Total
Revenue
• The marginal revenue curve
shows the change in total
revenue that results as a firm
moves along the segment of the
demand curve that lies exactly
above it.
• Total revenue is maximum
when marginal revenue equals
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zero.
TYPES OF BARRIERS TO
ENTRY
1. Government franchises, or firms that become
monopolies by virtue of a government directive.
2. Patents or barriers that grant the exclusive use of
the patented product or process to the inventor.
3. Economies of scale and other cost advantages
enjoyed by industries that have large capital
requirements. A large initial investment, or the
need to embark in an expensive advertising
campaign, deter would-be entrants to the industry.
.
Ownership of a scarce factor of production: If
production requires a particular input, and
one firm owns the entire supply of that input,
that firm will control the industry.
The Social Costs of Monopoly
• Monopoly leads to
an inefficient mix
of output.
• Price is above
marginal cost,
which means that
the firm is under
producing from
society’s point of
view.
The Social Costs of Monopoly
• The triangle ABC
measures the net
social gain of
moving from 2,000
units to 4,000 units
(or welfare loss
from monopoly).
Rent-Seeking Behavior
• Rent-seeking behavior refers
to actions taken to preserve
positive profits.
• A rational owner would be
willing to pay any amount
less than the entire green
rectangle to prevent those
positive profits from being
eliminated as a result of
entry.
Monopolistic Competition
Monopolistic competition is a common form of
industry (market) structure characterized by:
a. large number of firms, none of which can
influence market price by virtue of size
alone.
b. Large number of purchasers
c. firms producing differentiated products
Some degree of market power is achieved by
firms producing differentiated products
d. New firms can enter and established firms
can exit such an industry with ease
e.
Price/Output
Determination in the Short Run
• In the short-run, a
monopolistically
competitive firm will
produce up to the
point where MR = MC.
• This firm is earning
positive profits in
the short-run.
Price/Output Determination in
the Long Run
• As new firms enter a
monopolistically competitive
industry, the demand curves
of existing firms shift to the
left, pushing MR with them.
• In the long run, profits are
eliminated. This occurs for a
firm when its demand curve is
just tangent to its average cost
curve.
Oligopoly
An oligopoly is a form of industry (market)
structure characterized by:
1. a few dominant firms
2. many purchasers
3. products may be homogeneous or
differentiated.
4. Firms are interdependent ie. the behavior
of one firm depends on the behavior of the
other
The Kinked Demand Curve
Model
• Above P*, an increase in price,
which is not followed by
competitors, results in a large
decrease in the firm’s quantity
demanded (demand is elastic).
• Below P*, price decreases are
followed by competitors so the
firm does not gain as much
quantity demanded (demand is
inelastic).