MARKET STRUCTURE

Definition
In economics, market structure is

the number of firms producing identical products which are homogeneous.

It also identifies how a market is made up in terms of:

The number of firms in the industry

The nature of the product produced

The degree of monopoly power each firm has Profit levels

The degree to which the firm can influence price Firms behaviour pricing strategies, non-price

competition, output levels The extent of barriers to entry The impact on efficiency

Characteristics of each model:

Number

and size of firms that make up the industry Control over price or output Freedom of entry and exit from the industry Nature of the product degree of homogeneity (similarity) of the products in the industry (extent to which products can be regarded as substitutes for each other) Diagrammatic representation the shape of the demand curve, etc.

Characteristics: Look at these everyday products what type of market structure are the producers of these products operating in?
Electric Guitar Jazz Body Remember to think about the nature of the product, entry and exit, behaviour of the firms, number and size of the firms in the industry. You might even have to ask what the industry is??

Vodka

Mercedes CLK Coupe

Canon SLR Camera

TYPES OF MARKET STUCTURE

a theoretical market structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly elastic demand curve. . Examples of this model are stock market and agricultural industries. Characteristics: Large number of firms Products are homogenous (identical) consumer has no reason to express a preference for any firm Freedom of entry and exit into and out of the industry Firms are price takers have no control over the price they charge for their product Each producer supplies a very small proportion of total industry output Consumers and producers have perfect knowledge about the market Demand Curve The individual firm will view its demand as perfectly elastic. A perfectly elastic demand curve is a horizontal line at the price. The demand curve for the industry is not perfectly elastic, it only appears that way to the individual firms, since they must take the market price no matter what quantity they produce. Therefore, the firms demand curve is a horizontal line at the market price.

Perfect competition

EXAMPLE
The following data represents a cost function of a perfect competitive firm:
TP or Q 0 1 2 3 4 5 6 7 8 9 60 30 20 15 12 10 8.57 7.5 6.67 45 42.5 40 37.5 37 37.5 38.57 40.63 43.33 105 72.5 60 52.5 49 47.5 47.14 48.13 50 45 40 35 30 35 40 45 55 65 AFC AVC ATC MC

10

46.5

52.5

75

If the market price, P < 37; this firm's output Q = 0; firm's economic profit, EP = -60 If the market price, P > 37, this firm's output Q > 0; firms' economic profit , EP= TR - TC. For example, when P = 65, Q = 9, EP = $65 x 9 - 50 X 9 = 135

By given the market demand at various price level, a market equilibrium price could be found. One firm's output level (column 2 in the above table)
TP or Q AFC AVC ATC MC

0
1 60 45 105 45

2
3 4 5 6 7 8 9 10

30
20 15 12 10 8.57 7.5 6.67 6

42.5
40 37.5 37 37.5 38.57 40.63 43.33 46.5

72.5
60 52.5 49 47.5 47.14 48.13 50 52.5

40
35 30 35 40 45 55 65 75

is obtained by comparing P and MC. Since all firms are having the same cost function, the market output level is the sum of individual firms' output (column 4 in the above table). By comparing the market supply and market demand, we can find the market equilibrium at: P= 46 and Q = 10500 At this level, each firm is losing 8 dollars, indicating a contraction in this industry. Some firms may leave in the long run, causing the market supply to decrease and equilibrium price will increase to the break-even level.
Qd / market demand 0 0 7500 9000 10500 17000 15000 13500 12000 10500

PRICE Qs (1 firm's output) PROFIT Qs(1500 firms in the market) / market supply 26 32 38 41 46 0 0 5 6 7 -60 -60 -55 -39 -8

56
66

8
9

63
144

12000
13500 (assuming identical cost function for all firms)

9500
8000

Monopoly

where there is only one provider of a product or service. Examples

Characteristics 1. A single seller: the firm and industry are synonymous. 2. Unique product: no close substitutes for the firms product. 3. The firm is the price maker: the firm has considerable control over the price because it can control the quantity supplied. 4. Entry or exit is blocked. Demand Curve Monopoly demand is the industry or market demand and is therefore downward sloping. Price will exceed marginal revenue because the monopolist must lower price to boost sales and cannot price discriminate in most cases. The added revenue will be the price of the last unit less the sum of the price cuts which must be taken on all prior units of output. The marginal revenue curve is below the demand curve.

are public utilities and professional sports leagues.

In this example, the cost function is the same as the one used in the perfect competition example. You can see from the following analysis that the output level and market price are different in monopoly . The output level is lower than output of the perfect competitive firm; and price is higher than the price of perfect competitive firm.

Example

TP or Q 0 1 2 3 4 5 6 7 8

AFC 60 30 20 15 12 10 8.57 7.5

AVC 45 42.5 40 37.5 37 37.5 38.57 40.63

ATC 105 72.5 60 52.5 49 47.5 47.14 48.13

MC 45 40 35 30 35 40 45 55

9
10 Pd 115 100 83 71 63 55 48 42 37 33 29 Qd

6.67
6 TR 0 1 2 3 4 5 6 7 8 9 10

43.33
46.5 MR 0 100 166 213 252 275 288 294 296 297 290

50
52.5 EP

65
75

0 100 66 47 39 23 13 6 2 1 -7 -5 21 33 42 30 3 -35.98 -89.04 -153 -235

By comparing the MR and MC unit by unit, we can find this firm's output at: Q = 4, and P= 63. This is the profit maximization output level, with EP = 42. It is possible for this firm to continue earning this profit in the long run as there are no competition in the market.

competition refers to a market situation with a relatively large number of sellers offering similar but not identical products. Examples are fast food restaurants and clothing stores. Characteristics 1. A lot of firms: each has a small percentage of the total market. 2. Differentiated products: variety of the product makes this model different from pure competition model. Product differentiated in style, brand name, location, advertisement, packaging, pricing strategies, etc. 3. Easy entry or exit. Demand Curve The firms demand curve is highly elastic, but not perfectly elastic. It is more elastic than the monopolys demand curve because the seller has many rivals producing close substitutes; it is less elastic than pure competition, because the sellers product is differentiated from its rivals.

Monopolistic Competition

Competition between the few May be a large number of firms in the industry but the industry is dominated by a small number of very large producers. Example music sales. Characteristics 1. Few large firms: each must consider its rivals reactions in response to its decisions about prices, output, and advertising. 2. Standardized or differentiated products. 3. Entry is hard: economies of scale, huge capital investment may be the barriers to enter. Demand Curve Facing competition or in tacit collusion, oligopolies believe that rivals will match any price cuts and not follow their price rise. Firms view their demands as inelastic for price cuts, and elastic for price rise. Firms face kinked demand curves. This analysis explains the fact that prices tend to be inflexible in some oligopolistic industries.

Oligopoly

Example

o Music sales

The music industry has a 5-firm concentration ratio of 75%. Independents make up 25% of the market but there could be many thousands of firms that make up this independents group. An oligopolistic market structure therefore may have many firms in the industry but it is dominated by a few large sellers.

Monopsony

market form in which only one buyer faces many sellers. Example is the health care companies. Characteristics Single Buyer: First and foremost, a monopsony is a monopsony because it is the only buyer in the market. The word monopsony actually translates as "one buyer." As the only buyer, a monopsony controls the demand-side of the market completely. If anyone wants to sell the good, they must sell to the monopoly. No Alternatives: A monopsony achieves single-buyer status because sellers have no alternative buyers for their goods. This is the key characteristics that usually prevents monopsony from existing in the real world in its pure, ideal form. Sellers almost always have alternatives. Barriers to Entry: A monopsony often acquires and generally maintains single buyer status due to restrictions on the entry of other buyers into the market. The key barriers to entry are much the same as those that exist for monopoly: (1) government license or franchise, (2) resource ownership, (3) patents and copyrights, (4) high start-up cost, and (5) decreasing average total cost.

Oligopsony

a market form in which the number of buyers is small while the number of sellers in theory could be large. Example is the cigarette companies. Characteristics

Small Number of Large Buyers: An oligopsony market is dominated by a small number of large buyers, each of which is relatively large compared to the overall size of the market. This generates substantial market control, the extent of market control depending on the number and size of the buyers. Few Alternatives: An oligopsony arises because sellers have few alternatives available for the goods they sell. While alternative buyers might exist, they tend to be less desirable. Barriers to Entry: Firms in a oligopsony market attain and retain market control through barriers to entry. The most common barriers to entry include patents, resource ownership, government franchises, start-up cost, brand name recognition, and decreasing average costs. Each of these make it extremely difficult, if not impossible, for potential competitors to enter the market.

SUMMARY
Market Structure

Seller Entry Barriers

Seller Number

Buyer Entry Barriers

Buyer Number

Perfect Competition

No

Many

No

Many

Monopolistic competition Oligopoly Oligopsony Monopoly Monopsony

No Yes No Yes No

Many Few Many One Many

No No Yes No Yes

Many Many Few Many One

one sellers buyers monopoly monopsony

few oligopoly oligopsony