CHAPTER 6: MARKET STRUCTURES
ECON 124 (MW 10:30-12:00 AM)
Market - defined as a group of firms and
individuals that are in touch with each other to buy
Pure & Perfect Competition
or sell some goods.
- Large number of buyers and sellers
- Homogenous products
Market structures - those characteristics of a
- Free entry and exit to industry
market that significantly affect the behavior and
- Buyer & Sellers are price takers
interaction of buyers and sellers.
- Perfect information available to buyers and
sellers
Determinants of Market Structures (ppt):
- Perfect Mobility of Resources
Number and size of sellers and buyers
Type of the product
Advantages of Perfect and Pure Competition
Conditions of entry and exit
- High degree of competition helps allocate
Transparency of information
resources to most efficient use
- Price=marginal cost
Determinants of Market Structures (bk):
- Normal profit made in the long run
1. Number of firms in the industry
- Firms operate at maximum efficiency
2. Nature of the product produced
- Consumers benefit
3. Degree of power each firm has
- Profit maximizing point-Marginal
4. Degree to which the firm can influence price
Revenue=Marginal Cost
5. Non-price competition or advertisement
6. Profit levels
What happens in a competitive environment?
7. Extent of barriers to entry
- Firm makes a short term abnormal profit
- Other firms enter the industry to take
advantage of the abnormal profit
Types of Market Structures - Supply increases – price supplies
1. Pure and Perfect Competition - Long run – normal profit made
2. Monopoly - Choice for consumers
3. Monopolistic Competition - Price sufficient for normal profit to be made
4. Oligopoly
Monopoly
- A single seller: the firm and industry are
synonymous. Unique product: no close
substitute to the firm’s product.
- The firm is the price maker: the firm has
considerable control over the price because
it can control the quantity supplied.
- Entry or exit is blocked.
Advantages of Monopoly: Factors of product differentiation
- Encourages R&D (Research & Development) Differentiation by type or style
- Encourages innovation - Sedan versus SUVs
- Development of products that are not likely Differentiation by location
without some guarantee of monopoly in - dry cleaner near home vs cheaper dry far
production away
- Economies of scale can be gained – Differentiation by quality
consumer may benefit - ordinary chocolate versus gourmet
Disadvantages: chocolate
- Exploitation of consumers – higher prices.
- Potential for supply to be limited –less
Advertising and Monopolistic Competition
choice.
Advertising
- is information provided by a company
Patent is a government grant of exclusive
about its products or operation, usually
ownership of an innovation.
through media such as television, radio,
- A patent is a source of monopoly power.
newspaper, magazine and the Internet
- Government franchise is a monopoly
(social media platforms/e-commerce) to
granted by a government license.
promote or maintain sales, revenue and
- Includes local power, telephone, and cable
profit.
companies.
- is frequently used by monopolistic
competition to accomplish two related
Monopolistic Competition goals – product differentiation and market
- Large number of small sellers and many power.
buyers
Oligopoly
- Products differentiated
- exists when there are a few large firms
Physical (color, features, functions, shape,
producing a homogeneous or
taste)
differentiated product that are dominated
Perceived Difference (packaging,
or much needed by the
branding, patents, copyrights, etc.)
market.
After sales services
- This market structure is characterized by
- Relatively free entry and exit
very few players, usually dominated by
- - Each firm may have a tiny “monopoly”
many firms, but the industry is dominated
because of differentiation of their products
by a small number of very large producers.
-Firm has some control over the price
- A concentration ratio exists in this form of
market structure.
Concentration Ratio - means that the proportion
Product differentiation plays a crucial role in
of total market sales (or share) held by the top
monopolistic competition. It is the only way these
number of firms (say 3-10) accounts for a huge
firms can acquire some market power.
percentage (say 75% and above) of all the sales in
the industry.
Tacit collusion is almost impossible when
There are many producers.
- Once the monopolist identifies this
quantity, it sets the highest price
consumers are willing to pay for that
quantity.
-
Profit Maximization for Monopolistic Competition
- A monopolistically competitive firm decides
on its profit maximizing price in the same
way as a monopolist, where MC=MR.
- faces a downward-sloping demand curve,
and so it will choose a combination of price
and quantity along its perceived demand
Profit Maximization
curve.
Marginal Cost – additional cost of producing one
more unit of output.
The Shutdown Point
Marginal Revenue – additional revenue obtained The firm will shut down once it cannot cover
from selling one more unit of output. average variable cost.
- The shutdown point is the point by which
Note: As long as the marginal revenue from selling the firm will gain more by shutting down
a unit of output is greater than the marginal cost than it will by staying in business.
of producing that unit of output the firm will make a - As long as total revenue is more than total
profit on that unit of output. variable cost, firm’s opted to temporarily
- if MR>MC produce more output to operate in a loss rather than shutdown.
increase profits
- if MR<MC , it will costs more to produce a Price Discrimination
unit of output than the firm can sell it for –
Price discrimination - is the business practice of
produce less output to increase profits
selling the same good at different prices to
different buyers.
- The characteristic used in price
Profit Maximization for Perfect and Pure
discrimination is willingness to pay (WTP).
Competition
- A firm can increase profit by charging
A perfectly competitive firm has only one major
higher price
decision to make – what quantity to produce.
to buyers with a higher WTP.
The profit maximizing for a perfectly competitive
Demand Curves
firm will occur at the level of output where
Perfect competition - perfectly elastic
marginal revenue is equal to marginal cost – that
Monopolistic competition - elastic
is where, MC=MR
Oligopoly has a kinked demand curve - (inelastic
for price cuts, elastic for price rise)
Profit Maximization for Monopoly
- Like a competitive firm, the monopolist
maximizes profit by producing the quantity
where MR=MC.
