Market Structures PDF

Market Structures  Introduction In discussing real-world competition, the focus quickly becomes market structure.  Market structure Market structure refers to classification system for the key traits of a market: (1)number of firms/sellers; (2)industries; s...

Market Structures  Introduction In discussing real-world competition, the focus quickly becomes market structure.  Market structure Market structure refers to classification system for the key traits of a market: (1)number of firms/sellers; (2)industries; similarities of the products they sell (3) the ease of entry and exit; Barriers to entry, if any (4) Types of demand & supply curves (with graphs)  Importance of studying market structures (1)Market structure is a way to classify and understand businesses based on the degree of competition they have within their industry. (2) It allows businesses to establish appropriate prices and (3) to effectively react to competitors' actions based on the demands and needs of the market. Types of Market Structures Perfect competition Monopolistic competition Monopoly Oligopoly  Perfect Competition  Types of Market Structures Perfect competition - Is a market structure characterized by a 1. Large number of small firms 2. Homogenous product 3. Very easy entry and exit from the market The Definition of Supply and Perfect Competition That the number of suppliers be large means that they do not have the ability to agree to control price or market share.  Perfect competition (no industry fits the 3 characteristics.) Examples: Agricultural products like rice, vegetables, salt  The Necessary Conditions for Perfect Competition (2) Firms' products are identical. This requirement means that each firm's output is indistinguishable from any other firm’s output. Firms sell homogeneous product.  The Necessary Conditions for Perfect Competition There is free entry and free exit. Firms are free to enter a market in response to market signals such as price and profit. No barriers to entry. Barriers to entry are social, political, or economic impediments that prevent other firms from entering the market.  Barriers to Entry Political-legal Government regulations Economic High Capital requirements, technological Social-cultural Religion, Culture, Norms  The Necessary Conditions for Perfect Competition The assumption is that the sellers and consumers have complete information. Firms and consumers know all there is to know about the market – prices, products, and available technology. Any technological advancement would be instantly known to all in the market.  The Necessary Conditions for Perfect Competition Firms are profit maximizers. The goal of all firms in a perfectly competitive market is profit and only profit. There is no non-price competition (based on quality, brand name, or the like).  The Necessary Conditions for Perfect Competition Both buyers and sellers are price takers. A price taker is a firm or individual who takes the market price as given. Neither supplier nor buyer possesses market power.  Market vs Individual Firms Market price adopted by the firms in a perfect competion. Market Firm Price Market supply Price PhP10 PhP10 8 8 A B C Individual 6 6 firm demand 4 Market 4 2 demand 2 0 0 1,000 3,000 Quantity 10 20 30 Quantity Each firm in a purely competitive industry is so small that it does not need to lower its price in order to sell additional output. Monopolistic Competition Monopolistic competition - Is a market structure characterized by a 1. Many small sellers 2. Differentiated products 3. Easy market entry and exit Monopolistic competition lies between these two extremes. Monopolistic competition is a market structure in which there are many firms selling differentiated products. Examples of industries with monopolistic competition Grocery Stores Restaurants, e.g. Fast Food Chains Retail Clothing and Footwear, e.g. Shoe Stores Stylists, e.g. Hair Dressers Hospitality Industry, e.g. Hotels  D = Market Demand ATC = Average Total Cost MR = Marginal Revenue MC = Marginal Cost The price charged by the monopolistic competitive firms are slightly higher than the market price, because they have differentiated products.  Demand for monopolistic competition is highly elastic for goods and services of the competing companies. Consumers may choose from the differentiated products of several firms. One company may reduce prices but will sacrifice a higher profit. Pricing for monopolistic competition Firms under monopolistic competition are price makers. They do not join the price wars. Companies often use distinct marketing strategies and branding to distinguish their products. Because the products may all serve the same purpose, the average consumer often does  How do firms under monopolistic competition differentiate? Firms often use distinct marketing strategies and branding to distinguish their products. Because the products may all serve the same purpose, the average consumer often does not know the precise differences between the various products, or how to determine what a fair price may be.