Market Structure & Market
Conduct
AG BM 102
Market Structure – those
characteristics of the market
that significantly affect the
behavior and interaction of
buyers and sellers
Market Models Summary
• With same curves, very different solution
with pure competition, monopoly, and
monopsony
• Monopolies overcharge
• Monopsonies hold prices down
Elements of market structure
• Seller concentration – concentration ratio
– market share by n leading firms, n= 4, 8,
20, 50
• Lots of ways for this to vary
– Four equal firms
– One big, three smaller
– Two big, two smaller – beef packing, poultry
Elements of market structure
• Product differentiation
– Commodity vs differentiated products
– Is this a product where people like to
experiment? – wine
– Is this a major purchase - automobile
Barriers to entry
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Product differentiation
Large initial investment
Control of raw materials
Can you start small and expand later?
Do established firms have cost advantages?
Will established firms fight back?
If things don’t work can you salvage your
investment?
Elements of market structure
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Buyer concentration
Economies of scale
Multi-plant economies of scale
Height of fixed costs & barriers to exit
Growth in market demand
– Growing market is easier to enter
– This usually does not mean food
Comments about structure
• Structure > conduct > performance
• How the market is organized affects
choices
• Some structures have a lot of market
power
• Monopolies & monopsonies
• Oligopoly – a few big sellers – most
industries
Market Conduct – a firm’s
policies toward its market and
toward the moves made by its
rivals in that market
Areas of Market Conduct
1. Setting Quality
2. Setting Prices
3. Discouraging new entrants or coercing
rivals
Monopolistic competition
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Small firms
Easy entry
Differentiated product
Differentiated product lets firms set prices
Ease of entry means new competition
erodes profits – pizza shops
• Lots of coming and going
Oligopoly
• A few big firms – known competitors
• Some control over own destiny
• Prisoner’s dilemma
Prisoner’s dilemma
Firm A large Q
Firm A small Q
Firm B large Q
Losses for both B makes some
money, A loses
money
Firm B small Q
A makes some Large profits for
money, B loses both
money
Prisoner’s dilemma
• If firms conspire they can do well
• If we can keep them apart, we are better
off
• Airlines
• Archer Daniels Midland- lysine
Kinked Demand Curve
• A few firms
• Two demand curves – one if everyone
does same thing
• The other if you change and they stay the
same
Kinked Demand
• On D1, you change price, everyone else
does too
• On D2, you change price no one follows
• When you lower price, D1 prevails –
everyone else lowers price
• When you raise price, D2 prevails – no
one else raises price
• Result prices rarely change
Kinked Demand
• Since prices can’t change, firms lose more
and more money as costs go up
• Firms need to try something else
• Government won’t let them get together
and talk
Cartels
• OPEC – Organization of Petroleum
Exporting Countries
• Try to restrict supply and keep prices up –
sometimes works
• Act jointly like a monopolist
• Requires a lot of discipline
• Medellin Cocaine Cartel – enforcement
mechanism
Price Leadership
• February 2003 – Airlines tried to raise
fares – Northwest wouldn’t follow – plan
failed – few days later smaller increase
• Some firm is accepted as price leader
• They announce increase – everyone else
expected to follow promptly
• If not, price war
• Steel, interest rates
Oligopoly
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Hard to work things out
Kinked demand is trap
Cooperation is illegal
Lots of different outcomes
Product differentiation
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Way of competing besides price
Food industry has a lot of this
Hard to duplicate competitor’s success
Coke & Pepsi
Coercion
• Predatory pricing – set prices to drive out
rival
• Entry deterrence – act to keep potential
rivals out
Conduct
• Structure > Conduct > Performance
• Structure defines choices
• Some industries deal with them better than
others
• Oligopoly especially problem for
participants