Market structures

Week 5
 Market Structure
Market structure identifies how a market is made up in terms
of:
The number of firms in the industry
The nature of the product produced
What level of profits can be made by the firm
How much market power firms have
The degree to which the firm can influence price
Firms behaviour pricing strategies, non-price competition, output
levels
The extent of barriers to entry
 Market Structure: Competition Scale
Pure
Perfect
Monopoly
Competition

Monopolistic Competition Oligopoly Monopoly

The further right on the scale, the greater the degree

of monopoly power exercised by the firm.
 Market Structure models
Characteristics of each model:
The number and size of firms that make up the industry or
market
Firms control over price or output
Freedom of entry and exit to/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 for each firms product

Adapted from: bizzed.ac.uk

 Perfect Competition
Large number of small firms
Each is a price taker
Large number of buyers
Perfect information
Homogeneous (identical) product
Freedom of entry and exit

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Perfect Competition: Firm Demand

The firm as a price taker

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Perfect Competition: Short-run
Equilibrium (1)

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 Perfect Competition: Short-run
Equilibrium (2)

Figure 6.6 Short-run equilibrium

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 Monopoly
Pure: single firm is the industry
Non-pure: more than 25% of industry output
in the hands of a firm or group of linked firms
(UK)
Characterised by barriers to entry

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 Barriers to Entry
Substantial scale economies
Minimum efficient size (MES) is large
Natural Monopoly (MES = industry output)
Control over productive resources
Intellectual property rights (e.g. patents,
copyright)

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Monopoly (pure): Equilibrium

Price (PM) and output (QM) for the pure monopoly

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 Monopoly vs Perfect Competition
Price could be deemed too high or may be set to
destroy competition (destroyer or predatory pricing),
price discrimination possible.
Efficiency could be inefficient due to lack of
competition
could be higher due to availability of high profits
Innovation - could be high because
of the promise of high profits, Possibly encourages
high investment in research and development (R&D)
 Price discrimination
This happens when a firm sells the same
product at different prices.
Consumers are grouped into two or more
independent markets and a separate price is
charged in each market, even though there is
no difference in costs of production or supply
 Conditions necessary for price
discrimination to operate
The firm must be able to set its prices-firms
cannot be price takers.
The markets must be separate
Demand elasticity must be different in each
market.
 Price discrimination: third degree

Figure 6.18 Third-degree price discrimination: charging different prices to different groups
of customers
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