Market Structures Umesh Ch. Sarma Asstt. Professor
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Market Structures Umesh Ch. Sarma Asstt. Professor Department of Economics Mangaldai College Market Structures KEY CONCEPT A market structure is an economic model that helps economists examine the nature and degree of competition among
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01
Market Structures Umesh Ch. Sarma
Asstt. Professor
Department of Economics
Mangaldai College<br>
Asstt. Professor
Department of Economics
Mangaldai College<br>
02
Market Structures KEY CONCEPT
A market structure is an economic model that helps economists examine the nature and degree of competition among businesses in the same industry.
WHY THE CONCEPT MATTERS
The level of competition in a market has a major impact on the prices of products. The more sellers compete , the more competitive prices will be.<br>
A market structure is an economic model that helps economists examine the nature and degree of competition among businesses in the same industry.
WHY THE CONCEPT MATTERS
The level of competition in a market has a major impact on the prices of products. The more sellers compete , the more competitive prices will be.<br>
03
Economists classify markets based on how competitive they are
Market structure—economic model of competition within an industry
Perfect competition—ideal model of a market economy
economists assess how competitiveness of market by where it falls short What Is Perfect Competition?<br>
Market structure—economic model of competition within an industry
Perfect competition—ideal model of a market economy
economists assess how competitiveness of market by where it falls short What Is Perfect Competition?<br>
04
The Characteristics of Perfect Competition Characteristic 1: Many Buyers and Sellers
No one buyer or seller has power to control price in the market
Many sellers means buyers can choose a producer with better price
Many buyers means sellers can all sell product at market price
lack of demand will not cause sellers to lower prices<br>
No one buyer or seller has power to control price in the market
Many sellers means buyers can choose a producer with better price
Many buyers means sellers can all sell product at market price
lack of demand will not cause sellers to lower prices<br>
05
The Characteristics of Perfect Competition Characteristic 2: Standardized Product
Standardized product—one producer’s product is identical to another’s
Perfect substitutes
Price is only basis for consumer choice<br>
Standardized product—one producer’s product is identical to another’s
Perfect substitutes
Price is only basis for consumer choice<br>
06
The Characteristics of Perfect Competition Characteristic 3: Freedom to Enter and Exit Markets
Producers can enter market when profitable and exit when unprofitable
Regulations do not restrict businesses from entering or exiting<br>
Producers can enter market when profitable and exit when unprofitable
Regulations do not restrict businesses from entering or exiting<br>
07
The Characteristics of Perfect Competition Characteristic 4: Independent Buyers and Sellers
Neither buyers nor sellers join together to influence price
Supply and demand set the equilibrium price
Independent action ensures that market stays competitive<br>
Neither buyers nor sellers join together to influence price
Supply and demand set the equilibrium price
Independent action ensures that market stays competitive<br>
08
The Characteristics of Perfect Competition Characteristic 5: Well-informed Buyers and Sellers
Buyers can compare prices
Sellers know what competitors charge, what buyers willing to pay
Price taker—seller that accepts market price set by supply and demand<br>
Buyers can compare prices
Sellers know what competitors charge, what buyers willing to pay
Price taker—seller that accepts market price set by supply and demand<br>
09
Competition in the Real World KEY CONCEPTS
No perfectly competitive markets; none meet all conditions
Imperfect competition—market structures that lack one or more of the conditions
Some markets come close, such as some wholesale farm products<br>
No perfectly competitive markets; none meet all conditions
Imperfect competition—market structures that lack one or more of the conditions
Some markets come close, such as some wholesale farm products<br>
10
Competition in the Real World Example 1: Wheat
Thousands of growers; decide only how much to produce at market price
Many buyers; standardized product; wholesale price easy to determine
In reality, several factors can interfere:
government subsidies; farmers or buyers sometimes band together<br>
Thousands of growers; decide only how much to produce at market price
Many buyers; standardized product; wholesale price easy to determine
In reality, several factors can interfere:
government subsidies; farmers or buyers sometimes band together<br>
11
Competition in the Real World Example 2: Chicken
Many producers; each chicken is standard
sellers can adjust only their production
Competition somewhat imperfect because
Poultry farmers may join together to influence price
Producers may say products differ due to factors such as feed<br>
Many producers; each chicken is standard
sellers can adjust only their production
Competition somewhat imperfect because
Poultry farmers may join together to influence price
Producers may say products differ due to factors such as feed<br>
12
Characteristics of a Monopoly KEY CONCEPTS
Monopoly—market structure with one seller, no substitutes for product
Cartel—organization of sellers that agree to set prices, limit output
Price maker—business without competitors, can set prices
Barrier to entry—obstacle to entering market
include government regulations, size, resources, technology Monopoly<br>
Monopoly—market structure with one seller, no substitutes for product
Cartel—organization of sellers that agree to set prices, limit output
Price maker—business without competitors, can set prices
Barrier to entry—obstacle to entering market
include government regulations, size, resources, technology Monopoly<br>
13
Characteristics of a Monopoly Characteristic 1: Only One Seller
Single business controls supply of product without close substitutes
De Beers cartel controlled diamond market in 20th century because
produced over half of world’s diamond supply
bought up diamonds from smaller producers to resell<br>
Single business controls supply of product without close substitutes
De Beers cartel controlled diamond market in 20th century because
produced over half of world’s diamond supply
bought up diamonds from smaller producers to resell<br>
14
Characteristics of a Monopoly Characteristic 2: A Restricted, Regulated Market
Government regulations allow single firm to control market<br>
Government regulations allow single firm to control market<br>
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Characteristics of a Monopoly Characteristic 3: Control of Prices
Monopolists can control prices because there are no close substitutes<br>
Monopolists can control prices because there are no close substitutes<br>
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Types of Monopolies KEY CONCEPTS
Natural monopoly—cost of production lowest with only one producer
Government monopoly—government owns and runs or permits only one producer
Technological monopoly—one firm owns invention, technology, method
Geographic monopoly—no other sellers within a region<br>
Natural monopoly—cost of production lowest with only one producer
Government monopoly—government owns and runs or permits only one producer
Technological monopoly—one firm owns invention, technology, method
Geographic monopoly—no other sellers within a region<br>
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Types of Monopolies Example 1: Natural Monopoly: A Water Company
In some markets, inefficient to have companies competing
Example: public utilities that require complex systems
economies of scale—average production cost falls as production grows
Government both supports and regulates<br>
In some markets, inefficient to have companies competing
Example: public utilities that require complex systems
economies of scale—average production cost falls as production grows
Government both supports and regulates<br>
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Types of Monopolies Example 2: Government Monopoly: The Postal Service
Government runs some businesses that provide goods and services
private firms cannot or do not want to provide because of low profits
Example: Postal Service has sole right to deliver first-class mail
New services and technologies now compete
private delivery companies, fax, e-mail, online bill paying<br>
Government runs some businesses that provide goods and services
private firms cannot or do not want to provide because of low profits
Example: Postal Service has sole right to deliver first-class mail
New services and technologies now compete
private delivery companies, fax, e-mail, online bill paying<br>
19
Types of Monopolies Example 3: Technological Monopoly: Polaroid
Patent—legal registration of invention; gives inventor sole rights
enables businesses to recover costs of development
Monopoly lasts for time limit of patent or until substitute invented
Patent let Polaroid keep Kodak out of instant-photography market
simpler cameras, digital cameras, quick processing reduced its market<br>
Patent—legal registration of invention; gives inventor sole rights
enables businesses to recover costs of development
Monopoly lasts for time limit of patent or until substitute invented
Patent let Polaroid keep Kodak out of instant-photography market
simpler cameras, digital cameras, quick processing reduced its market<br>
20
Types of Monopolies Example 4: Geographic Monopoly: Professional Sports
Sports leagues tie teams to cities, regions; limit number of teams
owners can charge high ticket prices, sell team merchandise
Physical isolation—no other supplier in area—lets owner control prices
Very small market may not support two businesses of same type<br>
Sports leagues tie teams to cities, regions; limit number of teams
owners can charge high ticket prices, sell team merchandise
Physical isolation—no other supplier in area—lets owner control prices
Very small market may not support two businesses of same type<br>
21
Profit Maximization by Monopolies KEY CONCEPTS
Monopoly cannot set prices too high
faces downward-sloping demand curve
raises equilibrium price by producing less than competitive market would
Most countries have laws to prevent monopolies<br>
Monopoly cannot set prices too high
faces downward-sloping demand curve
raises equilibrium price by producing less than competitive market would
Most countries have laws to prevent monopolies<br>
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Profit Maximization by Monopolies EXAMPLE: Drug Manufacturer
Drug companies maximize profits during patent period
afterwards, others market cheaper generic versions
Schering-Plough strongly marketed non-drowsy antihistamine Claritin
made up to $3 billion per year worldwide with patent
after patent ended sales dropped to about $1 billion per year<br>
Drug companies maximize profits during patent period
afterwards, others market cheaper generic versions
Schering-Plough strongly marketed non-drowsy antihistamine Claritin
made up to $3 billion per year worldwide with patent
after patent ended sales dropped to about $1 billion per year<br>
23
KEY CONCEPTS
Most real markets fall between perfect competition and monopoly
Monopolistic competition—many sellers offer similar products
one of most common market structures
product differentiation—sellers try to distinguish their products from similar ones
non-price competition—use factors other than price to attract customers Other Market Structures<br>
Most real markets fall between perfect competition and monopoly
Monopolistic competition—many sellers offer similar products
one of most common market structures
product differentiation—sellers try to distinguish their products from similar ones
non-price competition—use factors other than price to attract customers Other Market Structures<br>
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Characteristics of Monopolistic Competition Characteristic 1: Many Sellers and Many Buyers
Many sellers and many buyers
fewer sellers than perfect competition but enough for true competition
Each seller chooses product to make, amount to make, price to charge
examples include T-shirts, batteries, Pizza restaurants<br>
Many sellers and many buyers
fewer sellers than perfect competition but enough for true competition
Each seller chooses product to make, amount to make, price to charge
examples include T-shirts, batteries, Pizza restaurants<br>
25
Characteristics of Monopolistic Competition Characteristic 2: Similar but Differentiated Products
Consumer loyalty gained with unique product or apparent difference
Sellers use market research to decide how to differentiate product
Chains use sophisticated techniques—learn consumer lifestyles, tastes
focus groups—moderated discussions with small groups of consumers
survey large numbers of consumers<br>
Consumer loyalty gained with unique product or apparent difference
Sellers use market research to decide how to differentiate product
Chains use sophisticated techniques—learn consumer lifestyles, tastes
focus groups—moderated discussions with small groups of consumers
survey large numbers of consumers<br>
26
Characteristics of Monopolistic Competition Characteristic 3: Limited Control of Prices
Differentiation gives producers limited control of prices
low price distinguishes some products
name brands or better quality priced higher
Consumers pay extra if they perceive important enough difference
will switch to substitute if price goes too high<br>
Differentiation gives producers limited control of prices
low price distinguishes some products
name brands or better quality priced higher
Consumers pay extra if they perceive important enough difference
will switch to substitute if price goes too high<br>
27
Characteristics of Monopolistic Competition Characteristic 4: Freedom to Enter or Exit Market
No great barriers to entry in monopolistically competitive markets
when firms earn profit, other firms enter and increase competition
competition can be difficult for small businesses against large ones
Some firms start to take losses
signal that it is time to exit the market<br>
No great barriers to entry in monopolistically competitive markets
when firms earn profit, other firms enter and increase competition
competition can be difficult for small businesses against large ones
Some firms start to take losses
signal that it is time to exit the market<br>
28
Characteristics of an Oligopoly KEY CONCEPTS
Oligopoly—market structure with only a few sellers offering similar product
Less competitive than monopolistic competition
each firm has large market share—percent of total sales in the market
Few firms due to high start-up costs—expenses of entering market<br>
Oligopoly—market structure with only a few sellers offering similar product
Less competitive than monopolistic competition
each firm has large market share—percent of total sales in the market
Few firms due to high start-up costs—expenses of entering market<br>
29
Characteristics of an Oligopoly Characteristic 1: Few Sellers and Many Buyers
A few firms dominate market
industry is oligopoly if four firms control 40 percent of market
About half of manufacturing industries in United States are oligopolies
include breakfast cereals, soft drinks, movies, industrial products<br>
A few firms dominate market
industry is oligopoly if four firms control 40 percent of market
About half of manufacturing industries in United States are oligopolies
include breakfast cereals, soft drinks, movies, industrial products<br>
30
Characteristics of an Oligopoly Characteristic 2: Standardized or Differentiated Products
Many industrial products standardized such as flat glass, aluminum
firms differentiate by brand name, service, location
Many consumer goods are differentiated
use marketing strategies, such as focus groups, surveys
create brand-name products that can be marketed widely<br>
Many industrial products standardized such as flat glass, aluminum
firms differentiate by brand name, service, location
Many consumer goods are differentiated
use marketing strategies, such as focus groups, surveys
create brand-name products that can be marketed widely<br>
31
Characteristics of an Oligopoly Characteristic 3: More Control of Prices
Each firm’s decisions about supply and price affect entire market
If one firm lowers prices, others probably will too
no firm gains market share from price drop; all risk losing profits
If one raises prices, others may not in order to gain market share
Anticipate competitors’ response to price, output, marketing changes<br>
Each firm’s decisions about supply and price affect entire market
If one firm lowers prices, others probably will too
no firm gains market share from price drop; all risk losing profits
If one raises prices, others may not in order to gain market share
Anticipate competitors’ response to price, output, marketing changes<br>
32
Characteristics of an Oligopoly Characteristic 4: Little Freedom to Enter or Exit Market
High start-up costs—such as factories, warehouses—make entry hard
new firm may sell on small scale; hard to compete with established ones
Established firms have resources, patents, economies of scale
High investment by firms in oligopoly make exit difficult
operations too vast, complex to sell and reinvest easily<br>
High start-up costs—such as factories, warehouses—make entry hard
new firm may sell on small scale; hard to compete with established ones
Established firms have resources, patents, economies of scale
High investment by firms in oligopoly make exit difficult
operations too vast, complex to sell and reinvest easily<br>
33
Thanks<br>