Market

Structures
Astha Khanna
 The Degree of Competition
• Classifying markets
– number of firms
– freedom of entry to industry
– nature of product
– nature of demand curve
• The four market structures
– perfect competition
– monopoly
– monopolistic competition
– oligopoly
Features of the four market structures
 Perfect Competition
• Assumptions
– firms are price takers
– freedom of entry
– identical products
– perfect knowledge
 Short-run equilibrium of industry and firm
under perfect competition

P
S MC AC

P D = AR
AR
AC = MR

D
O O Qe
Q (millions) Q (thousands)

(a) Industry fig (b) Firm

Loss minimising under perfect competition

P AC
S MC

AC
D1 = AR1
P1 AR1
= MR1

D
O O Q
Q (millions) Q (thousands)

(a) Industry fig (b) Firm

 Perfect Competition
• Long-run equilibrium of the firm

– all supernormal profits competed away

– LRAC = AC = MC = MR = AR
 Long-run equilibrium of the firm under
£
perfect competition
(SR)MC
(SR)AC

LRAC

DL
AR = MR

LRAC = (SR)AC = (SR)MC = MR = AR

O Q
 Monopoly
• Defining monopoly
• Barriers to entry
– economies of scale
– product differentiation and brand loyalty
– lower costs for an established firm
– ownership/control of key factors
– ownership/control over outlets
– legal protection
– mergers and takeovers
– aggressive tactics
– intimidation
 Monopoly
• The monopolist’s demand curve
– downward sloping
– MR below AR
• Equilibrium price and output
– Equilibrium output, where MC = MR
£ Profit maximisingMCunder monopoly

MR
O Qm Q
 Monopoly
• The monopolist’s demand curve
– downward sloping
– MR below AR
• Equilibrium price and output
– Equilibrium output, where MC = MR
– Equilibrium price, found from demand curve
 Profit maximisingMCunder monopoly
Total profit
AC

AR

AC

AR
MR
O Qm Q
 Monopoly
• The monopolist’s demand curve
– downward sloping
– MR below AR
• Equilibrium price and output
– Equilibrium output, where MC = MR
– Equilibrium price, found from demand curve
• Profit
– Measuring profit
– Supernormal profit can persist in long run
 Monopoly
• Disadvantages of monopoly
– high prices / low output: short run
– high prices / low output: long run
– lack of incentive to innovate
– X-inefficiency
• Advantages of monopoly
– economies of scale
– profits can be used for investment
– high profits encourage risk taking
 Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
 Short-run equilibrium of the firm
under monopolistic competition
MC

AC

Ps

ACs

AR  D

MR
O Qs Q
Monopolistic Competition
 Long-run equilibrium of the firm
under monopolistic competition

LRMC

LRAC

PL

ARL  DL

MRL
O QL Q
 Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
– long run
– underutilisation of capacity in the long run
Long run equilibrium of the firm under
perfect and
monopolistic competition
LRAC

P1

P2
DL under perfect
competition

DL under monopolistic
competition

fig
O Q1 Q2 Q
 Monopolistic Competition
• Assumptions of monopolistic competition
• Equilibrium of the firm
– short run
– long run
– underutilisation of capacity in the long run
• Non-price competition
• The public interest
– comparison with perfect competition
– comparison with monopoly
 Oligopoly
• Key features of oligopoly
– barriers to entry

– interdependence of firms

• Competition versus collusion

• Collusive oligopoly: cartels

– equilibrium of the industry
£ Profit-maximising cartel
Industry MC

P1

Industry D AR
Industry MR
O Q1 fig
Q
 Oligopoly
• Key features of oligopoly
– barriers to entry

– interdependence of firms

• Competition versus collusion

• Collusive oligopoly: cartels

– equilibrium of the industry

– allocating and enforcing quotas

 Oligopoly
• Factors favouring collusion
– Few firms
– Open with each other
– Similar production methods and average costs
– Similar products
– Dominant firm
– Significant entry barriers
– Stable market
– No government measures to curb collusion
 Kinked demand for a firm under
oligopoly

D
P1

D
O Q1 Q
fig
 Profit-maximising output under
third degree price discrimination

MC

9
7
5
DY
DX MRY MRT
O 1000 O 2000 O 3000
MRX

(a) Market X (b) Market Y (c) Total

fig (markets X + Y)