Market Structure
- 2. Competition Competition creates choices for consumers and keeps prices down. This ensures firms remain accountable to consumers. Price is an obvious area of competition Non-price competition involves changing anything but price.
- 3. Market Structure Clearly various firms operate within different market structures. The market structure influences its decisions regarding price and output. There are five factors that help determine market structure. The number (and size) of firms in the market The degree to which competitors’ products are similar A firm’s control over price The ease with which firms can enter or leave the market The amount of non-price competition There are four basic market structures: perfect competition, monopolistic competition, oligopoly, and monopoly.
- 4. Types of Market Structures Many Producers One Producer Perfect Competition Monopolistic Competition Monopoly Oligopoly
- 5. Perfect Competition Many producers and a uniform product. Many buyers and sellers. Individuals have no control over market supply. Products are relatively the same. Price Takers Relatively east to enter and exit the market. Little non-price competition.
- 6. Monopolistic Competition Many firms. Similar but not identical product. Firms large enough to influence total supply (some price influence) Easy for a new firm to start up None price competition is significant
- 7. Oligopoly It is dominated by a few, very large firms Some differentiation depending on the industry. Firms freedom to set price varies from slight to substantial. Significant barriers to entry. Non-price competition can be intense.
- 8. Monopoly Completely dominated by a single firm. Firm has complete control over total supply. The firm produces a unique product, no substitutes. Price maker. Major barriers to entry No direct competitions (need not engage in non-price competition)
- 9. Perfect Competition The success of a firm depends on how well it manages its costs. Firms that are the most efficient will be rewarded with profit. How can achieving low costs work against a firm in a perfect competition???? Does a perfectly competitive market exist ???
- 10. Monopolistic Competition Most prevalent in the service and retail sectors. Firms use product differentiation (distinguish their product or service from the competitors) How can firms differentiate their products? Promotion, Packaging, Location, Services, Quality This leads to brand loyalty. Think of a company in which you are loyal. Why are you loyal? What has that company done to win your loyalty?
- 11. Oligopoly At times, observers suspect a price conspiracy exists between some oligopolies (banks, gas stations) Consumers push firms to compete on price. Sometimes competitors take part in collusion (a secret agreement among firms to set prices, limit output or reduce competition. This is illegal in Canada.
- 12. Monopoly Copyright law gives writers control of the work they produce. Patent law protects inventors and developers of a new product or technology. Government contract may produce a monopoly. Producers can create a monopoly (professional sports teams) Some products particularly those with high fixed costs, are more efficiently produced by a monopoly. This is called a natural monopoly. Some monopolies are now being open for market competition through deregulation. Privatization involves the sale of public assets to private
- 13. Is Bigger Better? Capital-intensive production can be more efficient but also results in fewer, very large producers competing as oligopolies. Successful firms frequently use profits to expand production by purchasing their competitors. Through mergers and takeovers firms reduce the risk of competition by controlling it. Without the pressure of competition prices can float upward. The benefits of efficient production and economies of scale are more likely to go to the producer as higher profits than to consumers in the form of lower prices.
- 14. Third-Party Costs Markets are not always good at passing on all the costs of production to those who consume the product. Non-monetary costs like pollution are social costs or third-party costs. Achieving production efficiency can sometimes lead to the destruction of scarce resources rather than their efficient use.
- 15. The Public-Private Balance During the three decades after 1960, governments expanded its role as a producer of essential services such as education and health care. By 1990 government spending seemed out of control. Government cut its spending, its payroll , and its services. Did governments make the right choices? Should we go further, inviting even more participation of private companies in the delivery of social programs such as health care?
- 16. Is Regulation the Answer? Markets cannot exist without regulations that define contracts, protect private property and competition, or require certain production standards. Regulations must be effectively enforce. We would like an economy that responds to our needs, but markets can only respond to demands. The difference is the ability to pay the market’s price. Considerations of equity rather than efficiency may be more important.