Chapter 131 Market Structure Market structure establishes the overall environment within which each firm operates Number and size distribution of buyers and sellers Type of product for sale ID: 548873
Download Presentation The PPT/PDF document "Market Structure and Power" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
Market Structure and Power
Chapter 13.1Slide2
Market Structure
Market structure: establishes the overall environment within which each firm operates
.
Number and size distribution of buyers and sellers
Type of product for sale
Whether firms in the same industry produce standardized products or differentiated products
Differentiated products are less substitutable
Barriers to entry
These reflect any increased costs that new firms must incur relative to existing firms when entering a particular market
High costs deter entry
Whether any asymmetry of information exists between buyer and sellersSlide3
Market Structure vs Market Power
Market structure affects market power
Market power refers to the firms ability to restrict output (or quality and thereby raise the price)
will dictate to some extent how firms behaveSlide4
Market Structure vs. Market Power
Degree of Market Power
0% ……………………………………..100%
Perfect Competition
Monopolistic
Competition
Oligopoly
MonopolyNo. sellersManyManyFewOneIndividual firm mkt. shareTinySmallLarge100%Type of productHDH or DHBarriers to entryNoneNoneSubstantialCompleteConsumer info.PerfectSlight ImperfectPerfect or ImperfectPerfect or Imperfect
H=Homogenous D=DifferentiatedSlide5
Measuring Market Concentration
Market concentration: reflects the number and size distribution of firms in an industry
E.g. perfect competition has a large number of firms with small market shares
Want to capture this structure with a statistics
Two measures of market concentration
Concentration ratio
Herfindahl-Hirschman IndexSlide6
Measuring Market Concentration
Concentration ratio
% of industry output produced by the largest firms in the industry
Industry output measured in terms of sales or volume of output
Four-Firm Concentration Ratio (CR
4
)
% of industry output produced by 4 larges firms60% indicates that the four large firms account for 60 percent of industry output<40% competitive40-60% monopolistic competition60+ oligopolySlide7
Measuring Market Concentration
Limitations
Only considers number and size distribution of firms when determining market structure
Does consider barriers to entry
Does not consider the distribution of output among the largest firms
Firms more likely to be price competitive when similarly sized compared to when one firm dominates the industry and others are much smallerSlide8
Measuring Market Concentration
Herfindahl
-Hirschman Index (HHI)
Takes into account the relative size of the largest firms in the concentration ratio
Si is the % of market share or % industry output produced by the
ith
firm.
N is the total number of firms in the industry 0 many firms, 10,000 one firmSlide9
Measuring Market Concentration
Market structure and HHI
No specific cut offs that reflect structure of the market using HHI
Department of justice has some guidelines concerning when the level of HHI triggers concern about the potential exploitation of market power
HHI<1000: reasonably competitive
1000>HHI<1800: mildly concentrated
HHI>1800: highly concentrated market