Market

Structures
Market structure – identifies how a
market is made up in terms of:
– The number of firms in the industry
– The nature of the product produced
– The degree of monopoly power each firm has
– The degree to which the firm can influence
price
– Profit levels
– Firms’ behaviour – pricing
strategies, non-price competition,
output levels
– The extent of barriers to entry
– The impact on efficiency

Market Structures
Market Structures
Market Structures
Market Structures
Importance:
• Degree of competition
affects the consumer –
will it benefit
the consumer or not?
• Impacts on the
performance
and behaviour of the
company/companies
involved.

Market Structures
 Look at these everyday
products – what type of
market structure are the
producers of these products
operating in?
Electric
Guitar –
Jazz Body
Bananas

Mercedes CLK Coupe

Remember to think about the nature of the product, entry and
exit, behaviour of the firms, number and size of the firms in the
industry.
One extreme of the market structure spectrum
Characteristics:
 Large number of firms
 Products are homogenous (identical)
– consumer has no reason to express
a preference for any firm
 Freedom of entry and exit into and out
of the industry
 Firms are price takers
– have no control over the
price they charge for their
product.
 Each producer supplies a very small
proportion of total industry output
 Consumers and producers have perfect knowledge about
the market

Perfect Competition
Where the conditions of
perfect competition do
not hold, ‘imperfect
competition’ will exist.

Varying degrees of
imperfection give rise
to varying market
structures.

Imperfect Competition
Imperfect competition is a
market situation where
individual firms have a
measure of control over the
price of the commodity in an
industry.
– a firm that can affect the
market price of its output
can be classified as an
imperfect competitor.
– Normally, imperfect
competition arises when an
industry's output is supplied
only by one, or a relatively
small number of firms.

Imperfect Competition
• An imperfect market is a
situation where individual firms
have some measure of control or
discretion over the price of the
commodity in an industry
– This imperfect competition does
not necessarily mean that a firm
can arbitrarily put any price on
its commodity
– an imperfect competitor does not
have absolute power over price

• Aside from discretion over price,

imperfect competitors may or
may not have product
differentiation/variation

Imperfect Competition
 Characteristics:
– Large number of firms in the
industry
– May have some element of
control over price due to the
fact that they are able to
differentiate their product in
some way from their rivals –
products are therefore close,
but not perfect, substitutes
– Entry and exit from the
industry is relatively easy –
few barriers to entry and exit
– Consumer and producer
knowledge imperfect

Monopolistic Competition
Important points:
• Some important points
about monopolistic
competition:
– May reflect a wide range
of markets
– Not just one point on a
scale – reflects many
degrees
of ‘imperfection’
– Examples?

Monopolistic Competition
Examples:
• Restaurants
• Plumbers/electricians/local
builders
• Solicitors
• Private schools
• Plant hire firms
• Insurance brokers
• Health clubs
• Hairdressers
• Funeral directors
• Estate agents
• Damp proofing control firms

Monopolistic Competition
• In each case there are many firms
in the industry
• Each can try to differentiate its
product in some way
• Entry and exit to the industry is
relatively free
• Consumers and producers do not
have perfect knowledge of the
market – the market may indeed
be relatively localised.
• Can you imagine trying to search
out the details, prices, reliability,
quality of service, etc. for every
plumber in the Philippines in the
event of an emergency??

Monopolistic Competition
Competition between the few
– May be a large number of firms
in the industry but the industry
is dominated
by a small number of very large
producers
Concentration Ratio – the
proportion of total market sales
(share) held by the top
3,4,5, etc. firms:
– A 4 firm concentration ratio of
75% means the top 4 firms
account for 75% of all
the sales in the industry

Oligopoly
Example:

The music industry has a 5-

firm concentration ratio of
75%. Independents make up
25% of the market but there
could be many thousands of
firms that make up this
‘independents’ group. An
oligopolistic market structure
therefore may have many
firms in the industry but it is
dominated by a few large

Oligopoly
sellers.
• Features of an oligopolistic
market structure:
– Price may be relatively stable across the
industry – kinked demand curve?
– Potential for collusion
– Behaviour of firms affected by what they believe
their rivals might do – interdependence of firms
– Goods could be homogenous or highly
differentiated
– Branding and brand loyalty may be a potent
source of competitive advantage
– Non-price competition may be prevalent
– Game theory can be used to explain some
behaviour
– AC curve may be saucer shaped – minimum
efficient scale could occur over large range of
output
– High barriers to entry

Oligopoly
• Market structure where the
industry is dominated by two
large producers
– Collusion may be a possible feature
– Price leadership by the larger of the
two firms may exist – the smaller
firm follows the price lead of the
larger one.
– Highly interdependent
– High barriers to entry
– In reality, local duopolies may exist

Duopoly
• Pure monopoly – where only
one producer exists in the
industry
• In reality, rarely exists – always
some form of substitute available!
• Monopoly exists, therefore,
where one firm dominates the
market
• Firms may be investigated for
examples of monopoly power
when market share exceeds 25%
• Use term ‘monopoly power’ with
care!

Monopoly
• Monopoly power – refers to cases
where firms influence the market in
some way through their behaviour –
determined by the degree
of concentration in the industry
– Influencing prices
– Influencing output
– Erecting barriers to entry
– Pricing strategies to prevent or stifle
competition
– May not pursue profit maximisation –
encourages unwanted entrants to the
market
– Sometimes seen as a case of market
failure

Monopoly
• Origins of monopoly:
– Through growth of the firm
– Through amalgamation,
merger or takeover
– Through acquiring patent
or license
– Through legal means –
Royal charter,
nationalization, wholly
owned place.

Monopoly
• Summary of characteristics of
firms exercising monopoly
power:
– Price – could be deemed too
high, may be set to destroy
competition (destroyer or
predatory pricing), price
discrimination possible.
– Efficiency – could be inefficient
due to lack of competition (X-
inefficiency) or…
• could be higher due to availability
of high profits

Monopoly
• Innovation - could be high
because of the promise of
high profits, Possibly
encourages high investment
in research and
development (R&D)
• Collusion – possible to
maintain monopoly power
of key firms in industry
• High levels of branding,
advertising and non-price
competition

Monopoly
• Problems with models – a
reminder:
– Often difficult to distinguish between a
monopoly and an oligopoly – both may
exhibit behaviour that reflects monopoly
power.
– Monopolies and oligopolies do not
necessarily aim for traditional
assumption of profit maximization.
– Degree of contestability of the market
may influence behaviour.
– Monopolies not always ‘bad’ – may be
desirable in some cases but may need
strong regulation.
– Monopolies do not have to be big –
could exist locally.

Monopoly
Final reminders:
• Models can be used as a comparison – they
are not necessarily meant to BE reality!
• When looking at real world examples, focus on
the behaviour of the firm in relation to what
the model predicts would happen – that gives
the basis for analysis and evaluation of the
real world situation.
• Regulation – or the threat of regulation may
well affect the way a firm behaves.
• Remember that these models are based on
certain assumptions – in the real world some
of these assumptions may not be
valid, this allows us to draw
comparisons and contrasts.
• The way that governments deal with firms
may be based on a general assumption that
more competition is better than less!

Market Structures
END.