Unit 4.4: Competition- Market Structures
The introduction worksheet looked at the example of one firm which is the sole
provider of a good or service. This type of market structure is called a MONOPOLY.
Other market structures exist that have different characteristics. The characteristics
of a market include:
1.
2.
3.
4.
How many firms compete in it
The degree of competition between them
The extent of their product differentiation (which is??________),
How easy it is for new firms to enter the market to compete with them.
Many competitors
One firm dominates market
Perfect Competition
Economists have developed the concept of perfect competition in order to compare
the different market structures. In a perfectly competitive market there will be:
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A large number of firms
Each firm sells identical products
Each firm must take the market price for their product
Perfect competition is a theoretical concept and doesn’t really exist in reality.
However, there are many examples of highly (but not perfectly) competitive
markets. For example, DVD street sellers in Shanghai operate in a highly competitive
market- they sell pretty much the same DVDs, there are many sellers in a particular
neighbourhood and each charges roughly the same price for the same DVD.
A highly competitive market will display many of the following features:
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•
•
•
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There will be vigorous price competition and ______________ competition
between firms
Firms will pursue different pricing ______________
Product features and brand images will be highly differentiated
Market shares and profits of competing businesses will vary over time
New firms will be able to enter the market and less _______________ firms that
are unable to compete will be forced to close
Monopoly
A monopoly is a market structure where one firm dominates the market. The firm
has the ability to set its own price. In a pure monopoly a single firm controls the
total supply of the whole industry. This means that the monopolist can reduce
supply (if they want) so forcing up market price and earning massive profits (known
technically as abnormal profits)
Problems with monopolies
As we saw in the introduction exercise, a monopoly is often in a position to abuse its
market power. Firms in a monopoly position can:
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restrict market supply to force up market price
restrict competition and consumer ____________ (see later)
cut product ___________ to save costs
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In addition, there may be: x-inefficiency
A monopoly may be poorly managed and inefficient because it does not
face any competition
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A need for regulation
Governments may have to use resources to investigate and punish
abuses of monopoly power
Regulating Competition
Competition policy refers to measures governments use to control the behaviour
of firms acting anti-competitively and against the interests of consumers
(1) Regulating the _____________ of monopolies
(2) Imposing ____________ on firms that abuse their market power
(3) Forcing monopolies to break up into smaller, competing firms
(4) Taking ownership of monopolies in key industries- e.g. electricity, water, post
service.
Governments also protect consumers from being sold poor quality or even harmful
goods through consumer protection laws. These protect consumers from
exploitation and harmful business activities, e.g. it is an offence to sell goods or
services which are unsafe or in an unsatisfactory condition or to give consumers
wrong information about prices and products
But…not all monopolies are bad.
A firm that is a monopoly may still act competitively and be good for consumers if:
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•
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It is a more efficient producer with lower ____________ than smaller firms
It faces competition from firms overseas and consumers are able to choose
products that are close _________________
It invests its profits in new product developments - some revolutionary
products, like the jumbo jet and photocopier, may never have been
developed if the business organizations that invented them were unable to
enjoy monopoly profits