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CHRISTIANA CHRISTOFI BA &
MA ECONOMICS
CHAPTER 23
MARKET STRUCTURE
LEARNING OBJECTIVES
01
02
03
analyse the effect
of having a high
number of firms
on price, quantity,
choice, profit
describe the
characteristics of
a monopoly
discuss the
advantages and
disadvantages of
monopoly
MARKET STRUCTURE
Refers to those characteristics of a
market that influence the behaviour of
buyers and sellers and the outcome they
achieve in terms of product, quality and
price.
These characteristics include:
number and size of firms in the market
the degree and intensity of price and
non price competition
the nature of barriers to entry
COMPETITIVE MARKETS
Firms compete in the market to increase their
customer base, sales, market share and profits.
Price Competition
Non-Price Competition
involves competing to offer consumers
the lowest or best possible prices of
a product
competing on all other features of the
product other than price
Money is all that matters
Quality, Quick shipping, Warranty
Elasticities
Product placements in trade fairs,
promotional campaigns, after sale care
Discount Store 99 cents, Primark
Metro grocery market, Zara
PRICE COMPETITION VS NON-PRICE COMPETITION
PERSUASIVE ADVERTISING IS DESIGNED TO CREAT E
A CONSUMER WANT AND PERSUADE THEM TO BUY THE
PRODUCT IN ORDER TO BOOST SALES.
Competitive
advantage – by
improving the
products, respond
immediately
PRICE SKIMMING: SETTING A HIGH
P R I C E F O R A N E W P R O D U C T T H AT I S
UNIQUE OR VERY DIFFERENT FROM
O T H E R P R O D U C T S O N T H E M A R K E T.
P E N E T R AT I O N P R I C I N G : S E T T I N G A V E R Y
L O W P R I C E T O AT T R A C T C U S T O M E R S T O
BUY A NEW PRODUCT
COMPETITIVE PRICING: SETTING A PRICE
S I M I L A R T O T H AT O F
COMPETITORS’ PRODUCTS WHICH ARE
A L R E A D Y AVA I L A B L E I N T H E M A R K E T
COST PLUS PRICING: SETTING PRICE BY ADDING
A FIXED AMOUNT TO THE COST OF MAKING THE
PRODUCT
D E S T R U C T I O N P R I C I N G ( P R E D AT O R Y
PRICING):
•
Prices are kept very low (lower
than the cost of production per
unit) in order to ‘destroy’ the
sales of existing products, as
consumers will turn to the
lowest priced products. Once
the product is successful, it
can raise prices and cover
costs.
PRICE WARS: A PRICE WAR IS WHEN TWO OR
M O R E R I VA L C O M PA N I E S L O W E R P R I C E S O F
C O M PA R A B L E P R O D U C T S O R S E RV I C E S W I T H
THE GOAL OF STEALING CUSTOMERS FROM
THEIR COMPETITORS—OR GAINING MARKET
SHARE.
PROMOTIONAL PRICING: SETTING
T H E P R I C E O F A F E W P R O D U C T S AT
B E L O W C O S T T O AT T R A C T
CUSTOMERS INTO THE SHOP IN THE
H O P E T H AT T H E Y W I L L B U Y O T H E R
PRODUCTS AS WELL
PERFECT COMPETITION
In a perfectly competitive market, there will be many sellers and
many buyers – a lot of different firms compete to supply an
identical product.
As there is fierce competition, neither producers nor consumers
can influence market price – they are all price takers. If any firm
did try to sell at a high price, it would lose customers to competitors.
If the price is too low, they may incur a loss. There will also be a
huge amount of output in the market.
PROFITS IN
COMPETITIVE MARKETS
•
In the short run, they may earn mote, or
less, than this level of profit which is
referred to as normal profit.
•
If demand for the product rises, the firms in
the industry will make higher than normal
profit. This level of profit, called
supernormal profit or abnormal profit, will
attract new firms into the industry.
M O N O P O LY
MARKETS
Scale of production: the size of production units and
the methods of production used.
Sunk costs: cost that cannot be recovered if the firm
leaves the industry.
GROUP ACTIVITY 2
In each case, consider what type of barriers to
entry and exit may exist in the following markets:
a)
Airlines
b)
Film production
c)
Steel production
d)
Window cleaning services
All Multiple Choice Questions
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HOMEWORK
Four-part questions a,b, d Page
206
Christiana Christofi - BA & MA Economics