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Market Structures

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Market Structures

Market structure refers to how the market isorganized, based mainly on the degree of competition among producers. There are four basic market structure.

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Market StructuresCharacteristics of market structure:– Number of producers- helps

determine the level of competition– Similarity of products-the degree to

which products in the market are similar. The more similar the products are, the greater the competition among producers

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Market Structures

– Ease of entry & exit- how easy is it to enter & exit. Markets that are easy to enter & exit , with few restrictions, have more producers and are more competitive.

– Control over price-The ability to influence prices--usually by (control over supply/output) increasing or decreasing the supply of goods--is known as market power.

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Market StructuresWireless cell phone provider“Cell phone jail” Offer customers fewer choices Require binding contractsClothing companies Give shoppers many choices No strings attached

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Market Structures

• Prior to the mid 1990 Tim Horton’s operated with market power in Canada.

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Market Structures• Perfect Competition is an ideal; there are few

market that are perfectly competitive• Characteristics of Perfect Competition:• Many Producers- no individual seller can influence price• Identical Products a product that is exactly the same is

called a commodity e.g. grain, cotton, milk & sugar• Easy entry and exit to market- Large number of buyers

and sellers • No control over price -–Producers are price takers –

have to accept the market price for their product • Easy access to information about products and prices• Transaction cost-the cost of shopping around

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Market Structures

• Example of perfect competition:– Market for milk– 65,000 dairy farmers in US– All offer the same basic commodity– No farmer has market power because of the

number of producers– Ease of entry- Anyone can enter the market

assuming he or she has the resources

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Market Structures

• Perfect competition exist mainly among agriculture products.

• Advantages of Perfect Competition:

• Firms operate at maximum efficiency

• Consumers benefit- easy access to information about product & price

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Imperfect Markets

• Most markets are NOT perfectly competitive

• These market do not allocate goods and services in the most efficient way

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Market Structures

What is a Monopoly? single suppler• Economist call this imperfect

competition• The most extreme version of imperfect

competition is monopoly

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Market Structures

• Monopoly share four main characteristics:– One Producer -consumer choice limited– Unique producer- no competition/close

subsitutes– High barriers to entry– Firm controls price OR output/supply- great

market power- price setters rather than price takers.

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Market Structures• Monopoly:• Pure monopoly – IS RARE!• May survive for a time , but will often

break down because of competition or government regulation.

• Most feared monopoly was Standard Oil.• Bankrupt its competitors; controlled

about 90 percent of U. S. oil sales.• Broke up in 1911 into smaller competing

companies.

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Microsoft

• Was the largest provider of computer operating systems

• Attempted to drive Netscape out of business by including a free web browser with Windows

• Was accused of monopoly/unfair competition

• Microsoft settled its case by changingthe way it dealt with other software fiirms.

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Market Structures

Three types of legal monopolies:• Resource monopoly – where firm controls key natural

resourcesAn example of a resource monopoly is De Beers (South Africa), a diamond mining company. De Beers owns the mines where diamond are found. By controlling this resource, De Beers is able to gain monopoly powers.

• Government-created monopolies-Right to grants a single firm or individual the exclusive right to provide a good or service.Pharmaceutical, National Park Service, Public Parking

• Natural Monopoly – high fixed costs – gas, electricity, water, telecommunications, rail

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Market Structures

• Advantages and disadvantages of monopoly:

• Advantages:– May be appropriate if natural monopoly– Encourages R&D and innovation– Development of some products not likely

without some guarantee of monopoly in production

– Economies of scale can be gained – the more you produce the cheaper;consumer may benefit

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Market Structures

• Disadvantages:– Higher prices– Limited supply/less choice– Potential for inefficiency –

–Complacency over controls on costs

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Market Structures

• Oligopoly is similar to monopoly• It is another form of imperfect

competition• Oligopolies are quite common in the

real economy • Examples include the airline industry,

car companies, or soft drink companies

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Market Structures

Oligopoly

– Industry dominated by small number of large firms, however, many firms may make up the industry

– High barriers to entry– Similar products could be differentiated -

e.g. Coke to Pepsi – Some control over prices

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Market Structures

• Identifying an Oligopoly (p.128 7.4):

• Concentration ratio – the proportion of market share accounted for by the four largest firms.

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Market StructuresWhen an Oligopoly Acts like a Monopoly

– Price leadership-Dominating firm may try to control the price through price leadership.

– Potential for collusion- when producers get together and make agreements on production levels and pricing

– Collusion is illegal because it unfairly limits competition

– Cartel formation-is an organization of producers established to set production and price level for a product. They are illegal in the U S, but sometime operate on a global scale, most often in commodities.

– OPEC is the best known cartel. OPEC consist on a dozen countries that agree to set quotas on oil production and exports.

– High degree of interdependence between firms

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Market Structures

Barnes & Noble sell a majority of books

publisher, ClearChannel and Viacom own a

major portion of radio stations in the U S 

Five companies own almost all of the channels on your TV set.

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Market Structures

Monopolistic competition has all thecondition of perfect competition except for identical products.

– Examples – shoes, designer clothing, cosmetics, restaurants, gas stations, service industries such as banks, auto repair shops, supermarkets.etc

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Market Structures• Monopolistic Competition

1 Many producers or sellers2 Products differentiated- real or perceived very close substitutes & competing brands are:• Distinct enough to appear unique customers may

develop brand loyalty • Loyalty give the favored company market power the company may have a tiny “monopoly” can charge more for its brand. • The competitive aspect is that if sellers raise or lower

prices, customer will ignore minor differences and change brands.

3 Relatively few barriers to entry and exit4 Firm has some control over price

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Market Structures

Increasing Market share Through Non-price Competition

Using price differiation and advertising to attract customers

Nonprice focus on four factors:1. Physical Characteristic- running shoes2. Service- Wholefoods vs Kroger's 3. Location- 4. Status and image- Designer jeans vs.. jeans

from K-Mart

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Market Failures:

Market Failures Definition:• Where the market structures do

not allocate goods and services in the most efficient way.

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Market Failures

• Market Failures occurs where:– Knowledge is not perfect - producers unaware of

opportunities, decisions often based on past decisions rather than future knowledge

– Goods are differentiated- designer labeling… they cost 3 x more but is the quality 3 X more?

– Resource immobility- land,labor, capital – Market Power- e.g. monopoly, collusion– Goods/Services would or could not be provided in sufficient

quantity by the market– Existence of external costs and benefits– Inequality exists

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Market Failures: What are Externalities?

• Externalities is spillover effects of production or consumption, some positive and others negative.

• An example of a positive externality is a technology spillover- when technical knowledge spreads to other companies thus causing further innovation.

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Positive Externality

• Immunization provides a positive externality. They protect the community---not just the recipients.

http://www.bized.co.ukMarket Failures: Negative Externality

• Factory pollution is a negative externality. It imposes a cost on people other than the producer and consumer (cost may be monetary, or an undesired effect).

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Market Failures: How Externalities Reflect Inefficiency

• Although positive and negative externalities have very different effect, they are both examples of inefficiency and market Failures.

• Why?-because they fail to factor all cost of production and all benefits to consumers into the model of supply and demand.

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Market Failures:

• External Costs• Decision makers do not take into

account the cost imposed on society and others as a result of their decision– e.g. pollution, traffic congestion, environmental

degradation, depletion of the ozone layer, misuse of alcohol, tobacco, anti-social behavior, drug abuse, poor housing

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Market Failures

• External benefits � – by products of production and decision

making that raise the welfare of a third party

– e.g. education and training, health education and preventative medicine

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Market Failures

• Goods and services that generate negative externalities tend to be overproduced.

• Goods an services that generate positive externalities tend to be under produced.

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Market Failures: Public Goods

• Goods and services that are not provided by the market system because of the difficulty getting people who use them to to pay for there use.

• Available to everyone (non excludable)• Consumption by one person does not prevent

another from consuming (non-rival in consumption)

• Free-rider problems- anyone who passes under a streetlight can use it.

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Market Failures: Private Good

• Available only to purchasers(excludable)

• Consumption by one person prevents another from consuming(rival in consumption)

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Assessment Question

Which of these is the best example of an

externality?

A. You decide to stop snacking between meals.

B. You enjoy looking at your neighbor’s garden.

C. Your shoe store stops selling your favorite style.

D. Your new bicycle goes faster than you expected.

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Assessment Question

Why do goods made in factories that causepollution tend to be overproduced?

A. Some stores stock more than they can sell.B. Some costs are not charged to the producer.C. Some benefits are wanted by the community.D. Some people may refuse to purchase the

items.

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