Structure Economy.ppt
- 1. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structures
- 2. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structures • Type of market structure influences how a firm behaves: – Pricing – Supply – Barriers to Entry – Efficiency – Competition
- 3. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structures • Degree of competition in the industry • High levels of competition – Perfect competition • Limited competition – Monopoly • Degrees of competition in between
- 4. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Determinants of market structure – Freedom of entry and exit – Nature of the product – homogenous (identical), differentiated? – Control over supply/output – Control over price – Barriers to entry
- 5. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Perfect Competition: – Free entry and exit to industry – Homogenous product – identical so no consumer preference – Large number of buyers and sellers – no individual seller can influence price – Sellers are price takers – have to accept the market price – Perfect information available to buyers and sellers
- 6. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Examples of perfect competition: –Financial markets – stock exchange, currency markets, bond markets? –Agriculture? • To what extent?
- 7. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Advantages of Perfect Competition: • High degree of competition helps allocate resources to most efficient use • Price = marginal costs • Normal profit made in the long run • Firms operate at maximum efficiency • Consumers benefit
- 8. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • What happens in a competitive environment? – New idea? – firm makes short term abnormal profit – Other firms enter the industry to take advantage of abnormal profit – Supply increases – price falls – Long run – normal profit made – Choice for consumer – Price sufficient for normal profit to be made but no more!
- 9. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Imperfect or Monopolistic Competition – Many buyers and sellers – Products differentiated – Relatively free entry and exit – Each firm may have a tiny ‘monopoly’ because of the differentiation of their product – Firm has some control over price – Examples – restaurants, professions – solicitors, etc., building firms – plasterers, plumbers, etc.
- 10. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Oligopoly – Competition amongst the few – Industry dominated by small number of large firms – Many firms may make up the industry – High barriers to entry – Products could be highly differentiated – branding or homogenous – Non–price competition – Price stability within the market - kinked demand curve? – Potential for collusion? – Abnormal profits – High degree of interdependence between firms
- 11. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Examples of oligopolistic structures: – Supermarkets – Banking industry – Chemicals – Oil – Medicinal drugs – Broadcasting
- 12. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Measuring Oligopoly: • Concentration ratio – the proportion of market share accounted for by top X number of firms: – E.g. 5 firm concentration ratio of 80% - means top 5 five firms account for 80% of market share – 3 firm CR of 72% - top 3 firms account for 72% of market share
- 13. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Duopoly: • Industry dominated by two large firms • Possibility of price leader emerging – rival will follow price leaders pricing decisions • High barriers to entry • Abnormal profits likely
- 14. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Monopoly: • Pure monopoly – industry is the firm! • Actual monopoly – where firm has >25% market share • Natural Monopoly – high fixed costs – gas, electricity, water, telecommunications, rail
- 15. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Monopoly: – High barriers to entry – Firm controls price OR output/supply – Abnormal profits in long run – Possibility of price discrimination – Consumer choice limited – Prices in excess of MC
- 16. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Advantages and disadvantages of monopoly: • Advantages: – May be appropriate if natural monopoly – Encourages R&D – Encourages innovation – Development of some products not likely without some guarantee of monopoly in production – Economies of scale can be gained – consumer may benefit
- 17. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure • Disadvantages: – Exploitation of consumer – higher prices – Potential for supply to be limited - less choice – Potential for inefficiency – X-inefficiency – complacency over controls on costs
- 18. http://www.bized.co.uk Copyright 2005 – Biz/ed Market Structure Kinked Demand Curve Price Quantity D = elastic D = Inelastic £5 100 Kinked D Curve