Workshop Three The Scope of Markets Markets take

Workshop Three

The Scope of Markets • Markets take various forms, but they all enable buyers and sellers to exchange products - shops, auctions, newspapers, the internet… • Markets operate at local, national and global levels – housing, cars, insurance, foreign currencies, coffee… • More IT innovations, communications, transport and increasing similarities in tastes => more global markets (e. g. books, operations…)

The Role of Markets • Markets allocate resources. They move resources from products experiencing a decline towards those experiencing an increase in demand - popularity increases prices, higher prices encourage suppliers…(e. g. football versus snooker)

A Competitive Market => – many buyers and sellers – no restrictions on entry and exit – responds quickly to changes in consumer demand

Barriers to Entry… Þ obstacles or restrictions which make it difficult for a firm to enter a market : Legal barriers (franchises, licences, patients, copyrights…) Access to barriers and resources & outlets (soil, climate conditions, natural resources…) Cost barriers (high costs before economies of scale, transportation…) Advertising and reputation (large-scale advertising expenditure, brand names…)

Barriers to Exit… Þ obstacles or restrictions which make it difficult for a firm to exit a market : • Sunk costs (money spent on advertising, specialised capital equipment…) • Long-term contracts

• In reality, many markets are not very competitive with few suppliers exercising considerable market power • E. g. multinational coffee companies are such large buyers of coffee that they can dictate the prices they pay to coffee producers of Brazil, Ecuador, Indonesia, Vietnam and other developing countries

• The participants in markets -> – Consumers – Suppliers – The government – Environmental groups (firms, the government, households…) • Consumers: seek low prices, high quality and ready availability of goods • Governments: seek to ensure that products are provided in the right quantities & that poor have access to essential goods and services • Environmental groups: try to protect the environment and conserve wildlife

• Markets = interlinked • More demand for one product • => more demand for another product (complements) • <= less demand for other products (substitutes)

Market Structures • There are 4 main market structures: – Perfect competition – Monopoly – Monopolistic competition – Oligopoly More competition => more power to consumers Less competition => more power to producers

• Perfect competition => lots of independent buyers and sellers, an identical product, no barriers to entry and exit, no loyalty – -ve : little product variation, little opportunity for economies of scale, time lost comparing products – +ve : high levels of competition => keeps costs low & lots of choice, firms responsive to demand E. g. , a fair example is the dollar market (although some buyers and sellers are more powerful). More theoretical…

• A pure monopoly => one seller in the market, high barriers to entry, a unique product, possible supernormal profits in the long run – -ve : possible high prices, low quality, lack of choices – +ve : low costs (and prices), money for R&D and for innovation -> to deter other companies, offers certain stability, safety E. g. , Deutesche Post, Bank of England

• Monopolistic competition => many independent sellers, differentiated products (sometimes only slightly), easy entry and exit, loyalty – +ve : competition keeps profits to normal profit levels and prices ‘fair’, consumer choice – -ve : not lowest possible costs for firms E. g. hairdressers, bistros… One way of assessing the degree of market power in a market is to calculate the market share of the largest firms

• Oligopoly market => dominated by a few firms, high barriers to entry and exit, possible supernormal profits in the long run – -ve : difficult to predict how firms will behave, may engage in price or non-price competition or collude (price wars, restricted competition), high barriers – +ve : low costs, potential low prices E. g. tobacco, copper, oil, slat