http www bized co uk Market Structures Copyright
http: //www. bized. co. uk Market Structures Copyright 2005 – Biz/ed
http: //www. bized. co. uk Market Structures • Determinants of market structure – Freedom of entry and exit – Nature of the product – homogenous (identical), differentiated? – Control over supply/output – Control over price – Barriers to entry Copyright 2005 – Biz/ed
http: //www. bized. co. uk Perfect Competition – Free entry and exit to industry – Homogenous product – identical so no consumer preference – Large number of buyers and sellers – no individual seller can influence price – Sellers are price takers – have to accept the market price – Perfect information available to buyers and sellers Copyright 2005 – Biz/ed
http: //www. bized. co. uk Perfect Competition • Examples of perfect competition: – Financial markets – stock exchange, currency markets, bond markets • Agriculture • Commodities Copyright 2005 – Biz/ed
http: //www. bized. co. uk Perfect Competition-Advantages • High degree of competition helps allocate resources to most efficient use • Price = marginal costs • Normal profit made in the long run • Firms operate at maximum efficiency • Consumers benefit Copyright 2005 – Biz/ed
http: //www. bized. co. uk Perfect Competition • What happens in a purely competitive environment? – New idea? – firm makes short term abnormal profit – Other firms enter the industry to take advantage of abnormal profit – Supply increases – price falls – Long run – normal profit made – Choice for consumer – Price sufficient for normal profit to be made but no more! Copyright 2005 – Biz/ed
http: //www. bized. co. uk Monopolistice Competition – Many buyers and sellers – Products differentiated – Relatively free entry and exit – differentiation of product – Some control over price Examples – restaurants, service professionals builders, plumbers, etc. Copyright 2005 – Biz/ed
http: //www. bized. co. uk • Oligopoly: Competition amongst the few – Industry dominated small number of large firms – High barriers to entry – Products could be highly differentiated (branding or homogenous) – Non–price competition – Price stability within the market – Potential for collusion? – High interdependence between firms – Price Leadership Copyright 2005 – Biz/ed
http: //www. bized. co. uk Oligopoly • Oligopolists can engage in price wars, or a series of price cuts that can push prices lower than the cost of production for a short period of time. • Oligopolists’ final prices are likely to be higher than under monopolistic competition and much higher than under perfect competition. Copyright 2005 – Biz/ed
http: //www. bized. co. uk Examples Oligopolistic Structures: – Supermarkets – Banking industry – Chemicals – Oil – Medicinal drugs – Broadcasting – Airlines – Wireless Providers Copyright 2005 – Biz/ed
http: //www. bized. co. uk Duopoly • Industry dominated by two large firms • Possibility of price leader emerging – rival will follow price leaders pricing decisions • High barriers to entry • Abnormal profits likely Copyright 2005 – Biz/ed
http: //www. bized. co. uk Monopoly • market structure with only one seller of a particular product for which there is no close substitute. • The United States has few monopolies because Americans prefer competitive trade, and technology competes with existing monopolies. • Natural Monopoly occurs when a single firm produces a product or provides a service because it minimizes the overall cost. (public utilities) Copyright 2005 – Biz/ed
http: //www. bized. co. uk • Geographic Monopoly occurs when the location cannot support two or more such businesses. (single gas station on exit or small town drugstore) • Technological Monopoly occurs when a producer has the exclusive right through patents of copyrights to produce a product or sell a particular product. (medical drugs) Copyright 2005 – Biz/ed
http: //www. bized. co. uk • Government monopoly occurs when the government passes certain laws reserving the right for a specific trade. (uranium processing) • The monopolist is larger than a perfect competitor, allowing it to be the price maker versus the price taker. Copyright 2005 – Biz/ed
http: //www. bized. co. uk Monopoly - Advantages – May be appropriate if natural monopoly – Encourages R&D – Encourages innovation – Development of some products not likely without some guarantee of monopoly in production – Economies of scale can be gained – consumer may benefit Copyright 2005 – Biz/ed
http: //www. bized. co. uk Monopoly • Disadvantages: – Exploitation of consumer – higher prices – Potential for supply to be limited - less choice – Potential for inefficiency Copyright 2005 – Biz/ed
http: //www. bized. co. uk Monopoly • Pure monopoly – industry is the firm! • Actual monopoly – where firm has >25% market share • Natural Monopoly – high fixed costs Examples: natural gas, electricity, water, telecommunications, railroads Copyright 2005 – Biz/ed
http: //www. bized. co. uk Four Conditions for Healthy Market 1. Adequate Competition 2. Buyers and Sellers are well-informed. 3. Resources must be free to move about. 4. Prices must reflect the cost of production. Copyright 2005 – Biz/ed
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