Market Structure
By Group #1:
Silvia Luque
Kyoungoung Min
Jasung Park
Charlie Li Qian
Samantha Rodriguez
Five Types of Market Structure
Perfect Competition
Monopolistic Competition
Oligopoly
Oligopsony
Monopoly
Perfect Competition
Economic model that describes a
hypothetical market form in which no
producer or consumer has the
market power to influence prices.
Description of Perfect
Competition
Efficient outcome
Foundation of the theory of supply
and demand
Market equilibrium
Resources and allocated and used
efficiently
Collective social welfare is
maximazed
Requirements
Atomicity
> Small producers &
consumers
Homogeneity
Goods & services are
substitutes = no product
differentiation
Perfect &complete info.
Firms & consumers know the
prices set by all firms
Equal access
Production technologies &
resources perfectly mobile
Free entry
Any firm may enter or exit the
market
Individual buyers and sellers
act independently
No scope for groups to change
price
Why does a Perfect Competition firms demand curve is
also its marginal revenue curve?
For a perfectly competitive firm with
no market control, the marginal
revenue curve is a horizontal line.
Because a perfectly competitive firm
is a price taker and faces a horizontal
demand curve, its marginal revenue
curve is also horizontal and coincides
with its average revenue (and
demand) curve.
Perfect Competition Graph
Example of Perfect
Competition
eBay auctions can be often be seen as perfectly
competitive. There are very low barriers to entry
(anyone can sell a product, provided they have
some knowledge of computers and the Internet),
many sellers of common products and many
potential buyers.
In the eBay market competitive advertising does
not occur, because the products are
homogeneous and this would be redundant.
However, generic advertising (advertising which
benefits the industry as a whole and does not
mention any brand names) may occur.
Free Software: Example of
Perfect Competition
Free software works along lines that
approximate perfect competition.
Anyone is free to enter and leave the
market at no cost. All code is freely
accessible and modifiable, and
individuals are free to behave
independently.
Monopolistic Competition
Monopolistic Competition
Characteristics:
– A large number of firms- it is like perfect
competition
– Entry easy – few barriers to entry and
exit, so it is unlike monopoly
– Differentiated products– they are
therefore closed, but not perfect,
Monopolistic Competition
The strategies for Differentiated products
Fast-food market
Mac Donald's, Taco-Bell, and Wendy’s
Brand Name
Starbucks
Monopolistic Competition
Implications for the diagram:
In the Short Run
Above-Normal Profit
MC
Price
ATC
P1
Abnormal Profit
A monopolistically
competitive firm faces a
Downward-sloping demand
curve. The firm maximizes
profit by producing Q1,
where MR=MC, and
charging a price, P1, given
by the demand curve above
Q1. Profit is the rectangle
CBAP1.
C=ATC
MR
Q1
Demand
Quantity
Monopolistic Competition
Implications for the
diagram:
Price
Normal Profit
MC
ATC
P
MR
Q
2
MR
Q
1
Notice that the existence
of more substitutes makes
the new AR (D) curve more
price elastic. The firm
reduces output to a point
where MC = MR (Q2). At
this output AR = AC and
the firm will make normal
profit.
AR(D) Demand
Quantity
Monopolistic Competition
Implications for the
diagram:
Price
Economic Loss
MC
ATC
C=ATC
P
Loss
1
MR
Q
1
D
Quantity
Because there is
relative freedom of
entry and exit into the
market, new firms will
enter encouraged by
the existence of
abnormal profits. New
entrants will increase
supply causing price to
fall. As price falls, the
MR curves shift
inwards as revenue
from each sale is now
less.
Monopolistic Competition
Implications for the
diagram:
Price
ATC
MC
Entry and Normal Profit
This is the long run
equilibrium position
of a firm in
monopolistic
competition.
In a
monopolistically
competitive
industry, entering
firms produce a
close substitute, not
an identical or
standardized
product.
D2 =ATC
D1
MR
Q
2
D2
Quantity
Perfect and Monopolistic Competition
Compared
The perfectly completive firm
produces at the point where the price
line, the horizontal MR curve,
MC
Price
intersects the MC curve. This is the
bottom of the ATC curve in the long
run, quantity Qpc at price Ppc . The
monopolistically competitive firm
ATC
means that the quantity produced,
where MR=MC. The downwardsloping demand curve faced by
monopolistically competitive firm
Pmc
means that the quantity produced,
Qmc is less than the quantity
MRpc =Dpc
Ppc
produced by the perfectly competitive
firm, Qpc. The price charged by the
monopolistically competitive firm is
also higher than that charged by the
perfectly competitive firm, Pmc
Dmc
MRmc
Qmc
versus Ppc. In both cases, however,
Qp
c
the firms earn only a normal profit.
Quantity
Monopolistic Competition
In each case there are many firms
in the industry
Each can try to differentiate its product
in some way
Entry and exit to the industry is relatively free
Consumers and producers do not have
perfect knowledge of the market – the
market may indeed be relatively localised.
Monopolistic Competition
Restaurants
Plumbers/electricians/local builders
Private schools
Plant hire firms
Insurance brokers
Health clubs
Hairdressers
Estate agents
Damp proofing control firms
An OLIGOPOLY is a market form in which
a market or industry is dominated by a
small number of sellers(Oligopolists)
Example of Oligopoly
around our life in U.S.A.
Fast foods
McDonalds,
Burger King,
KFC
Bookstores
Amazon, Barnes & Noble
Oils
Shell, ExxonMobil
Electrical goods
SONY, Dell
Mobile phone networks
Verizon, AT&T
Characteristics of Oligopoly
Product Branding
Entry barriers
Interdependent decision-making
Non-price competition
Oligopsony
A market dominated by many
sellers and a few buyers
Definition of Oligopsony
An oligopsony is a market form in which
the number of buyers is small while the
number of sellers in theory could be large.
This typically happens in market for inputs
where a small number of firms are
competing to obtain factors of production.
It contrasts with an oligopoly, where there
are many buyers but just a few sellers.
An oligopsony is a form of imperfect
competition.
Cocoa: Example of Oligopsony
Three Buyers of Cocoa Bean
Three firms buy the
vast majority of world
cocoa bean
production, mostly
from small farmers in
third-world countries.
Tobacco in US: Example of
Oligopsony
Three Major Buyers of Tobacco in
US
Three companies
(Altria, Brown &
Williamson, and
Lorillard Tobacco
Company) buy almost
90% of all tobacco
grown in the US.
Characteristics of Oligopsony
The buyers have a major advantage over
the sellers.
– They can play off one supplier against another,
thus lowering their costs.
– They can also dictate exact specifications to
suppliers, for delivery schedules, quality, and
(in the case of agricultural products) crop
varieties.
– They also pass off much of the risks of
overproduction, natural losses, and variations
in cyclical demand to the suppliers.
What is a Monopoly?
A monopoly is a market structure
in which there is a single supplier
of a product .
“Monopoly" is a term from
economics that refers to a
situation where only a single
company is providing an
irreplaceable good or service.
How do Monopolies Occur?
This was a side effect of being the
inventor of a product for which there
is high demand but no preexisting
supply. Other monopolies occur
when consolidation across industries
results in a single supplier. This was
the case with the company Standard
Oil, which had to be broken up by
the government in 1911.
Description of a Monopoly
One firm that produces a good that
is desired by customers
The firm in question is the only place
where the good or service can be
found, they have the ability to
charge whatever they want, to the
damage of market competition that
is the foundation of a healthy
economy.
Advantages of a Monopoly
Research and Development. Supernormal
Profit can be used to fund high cost capital
investment spending. Successful research
can be used for improved products and
lower costs in the long term.
Economies of scale. Increased output will
lead to a decrease in average costs of
production. These can be passed on to
consumers in the form of lower prices.
Disadvantages of a Monopoly
Price and Lower Output than under
Perfect Competition. This leads to a
decline in consumer surplus and a
deadweight welfare loss
A monopoly is productively inefficient
because it is not the lowest point on
the Average Cost curve
Disadvantages of a Monopoly
(Continued)
A Monopolist makes Supernormal
Profit leading to an unequal
distribution of income.
A monopoly may use its market
power and pay lower prices to its
suppliers.
Graphing a Monopoly
Example of a Monopoly
A recent example of a monopoly would be
that of the pharmaceutical giant Pfizer
over the drug Viagra®, which at the time
of its release had no substitutes or
competitors.
Microsoft; settled anti-trust litigation in
the U.S. in 2001; fined by the European
Commission in 2004, which was upheld for
the most part by the Court of First
Instance of the European Communities in
2007. The fine was 1.35 Billion USD in
2008 for incompliance with the 2004 rule
Monopolistic Competition
Characteristics:
– A large number of firms- it is like perfect
competition
– Entry easy – few barriers to entry and
exit, so it is unlike monopoly
– Differentiated products– they are
therefore closed, but not perfect,
The strategies for Differentiated
products
Fast-food market
Mac Donald's, Taco-Bell, and
Wendy’s
Brand Name
Implications for the
diagram:
Price
In the Short Run
MC
Above-Normal Profit
ATC
P1
Abnormal Profit
A monopolistically competit
ive firm faces a Downward-s
loping demand curve. The fi
rm maximizes profit by prod
ucing Q1, where MR=MC, an
d charging a price, P1, give
n by the demand curve abo
ve Q1. Profit is the rectangl
e CBAP1.
C=ATC
MR
Q1
Demand
Quantity
Implications for the diagram:
Normal Profit
MC
Price
ATC
P
MR
Q2
MR
Q1
AR(D)
Demand
Quantity
Notice that the existence o
f more substitutes makes t
he new AR (D) curve more
price elastic. The firm redu
ces output to a point wher
e MC = MR (Q2). At this out
put AR = AC and the firm w
ill make normal profit.
Implications for the diagram:
Economic Loss
Price
MC
ATC
C=ATC
P1
Loss
MR
Q1
D
Quantity
Because there is relativ
e freedom of entry and
exit into the market, ne
w firms will enter enco
uraged by the existenc
e of abnormal profits. N
ew entrants will increas
e supply causing price
to fall. As price falls, th
e MR curves shift inwar
ds as revenue from eac
h sale is now less.
Implications for the diagram:
ATC
Entry and Normal Profit
MC
Price
D2 =ATC
D1
MR
Q2
D2
Quantity
This is the long
run equilibrium
position
of a firm in
monopolistic
competition.
In a
monopolistically
competitive
industry,
entering firms
produce a close
substitute, not
an identical or
standardized
product.
The perfectly completive firm produce
s at the point where the price line, the
horizontal MR curve, intersects the M
MC
Price
C curve. This is the bottom of the ATC
curve in the long run, quantity Qpc at p
rice Ppc . The monopolistically competi
ATC
tive firm means that the quantity prod
uced, where MR=MC. The downward-s
loping demand curve faced by monop
olistically competitive firm means that
Pmc
the quantity produced, Qmc is less th
an the quantity produced by the perfe
MRpc =Dpc
Ppc
ctly competitive firm, Qpc. The price c
harged by the monopolistically comp
etitive firm is also higher than that ch
arged by the perfectly competitive fir
m, Pmc versus Ppc. In both cases, ho
wever, the firms earn only a normal pr
Dmc
MRmc
Qmc
Qpc
ofit.
Quantity
In each case there are many firms
in the industry
Each can try to differentiate its
product
in some way
Entry and exit to the industry is
relatively free
Consumers and producers do not
Restaurants
Plumbers/electricians/local builders
Private schools
Plant hire firms
Insurance brokers
Health clubs
Hairdressers
Estate agents
References
http://en.wikipedia.org/wiki/Market_structure
http://en.wikipedia.org/wiki/Oligopsony
http://www.callebaut.com/nlnl/
http://www.autoracing1.com/MarkC/2001/0904Sponsors.htm
http://www.rcpedreira.com.ar/Paginas/companias.htm
http://en.wikipedia.org/wiki/oligopoly
http://ww.bized.co.uk/educator/16-19/economics/firms/activity/structure.htm
http://tutor2u.net/economics/revision-notes/a2-micro-oligopoly-overview.html
http://www.wisegeek.com/what-is-a-monopoly.htm