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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
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Perfect Competition: Firm Demand
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Perfect Competition: Short-run
Equilibrium (1)
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Perfect Competition: Short-run
Equilibrium (2)
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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
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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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