Economics
Chapter 7
Competition and
Market Structure
Market

Definition


Any arrangement which facilitates trade.
Types


Product market – transaction of goods and services
Factor market – transaction of factors of production,
such as labour
Classification
Market
Product Market
(Goods and services)
Factor Market
(Factors of production)
Focus – Product Market


A market is any arrangement which enable transactions of a good or
service take place.
Examples

Products





Services




Fish market
Oil market
Jewellery market
Property market
Transportation market
Education market
Health care market
Special example

Stock market


Product market, in terms of transaction of shares as a final product
Factor market, in terms of collection of capita
Transaction

Different ways



In-person, face-to-face:
 Buyers buy products directly from seller
 E.g. Housewives buy flowers from the flower stalls
Documentation
 Buyers subscribe to a product by mail.
 E.g. Magazine subscription
E-channel
 Buyers subscribe to a product through the internet, email or
phone-call
 E.g. Film ticket booking & Direct sale
Classification
Market Structure
Perfect Competition
(Perfectly competitive market)
Imperfect Competition
(Imperfectly competitive market)
Competition

Definition
 Under scarcity, both buyers and sellers want to gain more
from the market transactions.
 Buyers bargain for lower prices and more gifts.
 Sellers compete for more customers and a larger profit.
 Hence, competition exists in all markets

Forms of competition


Price competition (Price War)
 Firms promote sales by cutting prices.
Non-price competition
 Firms use ways other than price reduction to promote sales
 E.g. better product quality, advertising, gift, after-sale
service
Degree of market competition and
monopoly power

Monopoly power (market power)





The influence of a firm has over prices
The ability of influencing the market by a firm
 Monopoly power  Competition 
 Monopoly power  Competition 
Example

A firm with high monopoly power, e.g. HK Electricity Ltd.


Increase the price  No loss of customers
A firm with low monopoly power, e.g. Chan Kee Store.

Increase the price  Customers will no longer buy goods from
the store
Classification of market structure

Perfect competition
or Perfectly competitive market
or Price-taking market



No monopoly power
Buy & sell according to market price
Imperfect competition
or Imperfectly competitive market
or Price-searching market


With monopoly power
 Price ≠ Loss of customer
General features
Perfect
competition
Imperfect
competition


No. of buyers
Many
No. of sellers
Many
Many or
Few (Comparatively)
Few
Ease of entry/exit
Easy
Difficult
Homogeneous
Heterogeneous
Perfect
Imperfect
Monopoly power
Nature of products
Availability of market
information
Nature of product
Homogeneous vs. Heterogeneous

Homogeneous products



Products which are completely the same.
Products are made by mass production.
Examples


Coca-Cola: The same product being sold in
supermarkets / convenient shops / stores.
Newspaper: Some product at different news-stand.
Nature of product
Homogeneous vs. Heterogeneous

Heterogeneous

Products sold are no the same in terms of



Products
Other factors
Examples


Hand made art craft : Unique, can be similar, but
not the same.
Food: Hamburger in McDonalds & Mos Burger.
From homogeneous to heterogeneous

Case 1:

Mr. A lives in TKO.

SCMP sold at TKO news-stand ≠ SCMP sold at Lantau Island
Reason: Mr. A prefers to buy a newspaper near his living place.


SCMP: $6
Case 2

Pocari Sweat (ionic drink)

Drink sold in Sports Ground ≠Drink sold in the supermarket
Reason: Sportsmen need the drink a.s.a.p. after playing sports.

Factors affecting products from
being homogeneous







Nature of the product
Quality (products, sales & after-sale services)
Advertising
Brand
Location of sales outlet
Convenience
Personal preference
Features of perfect competition

Many buyers and sellers


Free entry and exit


Info. About the quality / price / availability
Only one price in the market


Products are the same
Perfect information


No barriers
Homogeneous products


Low marker share
Customers will only pay for the lowest price
No non-price competition

Perfect info.  No bargaining / non-price competition
In search of
perfectly competitive market



Theoretically
A slightly increase in price, totally loss of customers in
perfectly competitive market.
In reality
Difficult to find perfectly competitive market
Reasons


Heterogeneous products (Products are always differentiated)
Imperfect information
Imperfect competition
Classification
 Monopolistic competition
 Oligopoly
 Monopoly
Monopolistic competition
Features
 Many buyers and sellers, low market share
 Heterogeneous products (*)
 No entry barriers
Examples
 Fashion retailing
 Newspaper retailing
 Medicine retailing
(apart from pharmaceutical products)
Monopolistic competition =
Price-searching market




Production differentiation
Consumers have their own choice
Individual firms set their own price
Average price in the market is a reference
Behaviour under
monopolistic competition

To make customers feel worthy:


Price competition
Non-price competition






Product quality
Better service
Gift
Advertising
Brand establishment
After-sale services
Comparison bet. Perfect competition and
Monopolistic competition
Main features
Perfect competition
Monopolistic competition
Many buyers and
sellers


Homogeneous
products


Free entry and exit


Perfect information

N/A
Sellers are price
takers


Non-price
competition


Bargaining behaviour


Other features
Monopoly
Features
 One seller in the market
 Product is unique & no close substitutes
 Entry barriers
Examples
 Hong Kong Stock Exchange
 HKEAA
 The Airport Authority Hong Kong
 Water Supplies Department
Monopoly = Price-searching market


A monopolist has the entire market
The single firm sets its own price
( P=MC, profit maximization )
Competition in Monopoly Market

Compete with substitute


Compete with factors of production


Labours / Land / Capital
Compete with other’s franchises


MTR vs. Bus / Taxi / Ferry
MTR vs. TKO Tunnel
Compete for social acceptance

Will the gov’t extend the franchise / entry barrier?
Why does Monopoly exist?
1. Restricted by law



Gov’t ownership
 The government is the sole supplier
 Public enterprises in HK
 E.g. water supply, CLP in Kowloon & HK Light in HK Island
Gov’t franchise (franchised monopoly)
 A privilege the gov’t grants to a firm
 Transport utilities in HK
 E.g. Star Ferry, KMB, MTR
Patent and copyright
 Patent: Exclusive owners/users of their inventions
 Copyright: Exclusive owners/users of their works (authors & artists)
Why does Monopoly exist?
2. Natural monopoly



Hugh entry cost
 Extremely high fixed cost at the beginning
Economies of scale
 Expansion of firm  Lower AC
 The firm can then lower the price
 Other firms have comparative high cost can’t survive
 Become natural monopoly
E.g. Water supply and electricity supply
Why does Monopoly exist?
3. Exclusive ownership of essential resources for
production

Resources are rare and owned by one firm
 E.g.

De Beer owns the world major diamond mines

The reservoirs are owned by HK Government

Extraction of petroleum by China National Petroleum
Corporation (中國石油天然氣集團公司)
Monopoly – Pros and Cons
Pros
 Economies of scale





firm: lower AC
customers: lower price
Reduce duplication of facilities
and avoid wastage
Easier regulations
Royalties
Cons
 Price controlled by single
firm
 Less choices
 No competition 
No improvement
 Approval of franchises
leads to corruption 
Higher cost of supervision
Oligopoly
Features
 The market is dominated by a few big firms
 Entry barriers
 Mutual influence of behaviour


Marketing strategy
 Pricing
 Output
 Promotion
Competition and cooperation between oligopoly

Association among firms (known as cartels)
 Cooperate to raise profits by agreed prices or restrictions
Oligopoly
Examples
 Gasoline supply: Caltex / CRC / Esso / Shell / Sinopec
 Telecommunication: 3HK / One2free / PCCW / Smartone
 TV Broadcast: TVB / ATV / Cable TV / Now TV
 Banking industry: HSBC / BOC / Heng Sang / Standard Chartered
Summary
Price-taking
market (Perfect
competition)
Price-searching market (Imperfect competition)
Monopolistic
competition
Many
Many
Homogeneous
Heterogeneous
Monopoly
Oligopoly
Main features
No. of buyers
and sellers
Product nature
Entry and exit
Easy
Market info.
Perfect
Easy
One Seller
Unique
Difficult
A few major
sellers
Homogeneous/
Heterogeneous
Difficult
Imperfect
Other features
Non-price
competition
None
Yes
Yes
Market power
None
Little
Greatest
Foreign
Exchange
(Theoretically)
News
stands,
restaurants
MTR,
bus services,
water supplies
Examples
Yes
Great
Banks,
gasoline
stations