Topic: Market Structure

1 What is a market?

A market refers to any arrangement in which transactions of goods

between buyers and sellers take place.

• Transaction may not involve money

• A market still exists even if transaction does not take place in a
specific place or there is no face-to-face contact

Example 1: Does a market exist?

1. Owen bought a garage kit on the Internet, it will be delivered to him

very soon.
________

2. Nigel promised to buy Celia a piece of cake if Celia gives him a tutorial
lesson

________

3. Today is Owen’s birthday. His mother gave him a red pocket money
envelop

________

2 The types of market structure

There are two main categories of market structure:

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3 Criteria used to classify market structure:

• Number of sellers and buyers

• Nature of the products (Homogeneous or heterogeneous goods?)
• Availability of market information
• Ease of market entry

4 Perfect Competition (Only exist in theory)

Features:

1. Large Number of Sellers

• The degree of competition is high

• No one could control the market price

2. Homogeneous product

• The appearance and quality of the goods are identical from the
buyer perspective
• No seller will charge a price higher than others for fear of
losing all customers

3. Free Entry and Exit

• Sellers can enter the market anytime without facing any

restriction
• New sellers will enter the market as long as they can make
profits

4. Perfect market information

• Sellers and buyers can obtain all market information

• Including prices, quality, production cost and criteria for
market entry

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Sellers’ behavior:

a) Sellers being Price Taker

• As homogeneous goods are sold and market information is
perfect, individual seller has no influence over the price
• Sellers have to take and sell the product at the given market
price

b) No non-price competition
• No non-price competition such as advertising and free gifts
• Since goods are homogenous, non-price competition cannot
attract buyers to buy their products

Example 2: Perfectly Competitive market?

(a) Is Taobao an example of perfect competition?

______________

Features: Yes/No Reason

Large number of
sellers?

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Free entry to the
market?

Homogenous product?

Perfect information?

(b) Is gold market under perfect competition?

_________________

Features: Yes/No Reason

Large number of
sellers?

Free entry to the

market?

Homogenous product?

Perfect information?

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5 Monopolistic Competition

Features:

1. Large number of sellers

• There are a large number of sellers

• Competition is keen but is lower than that of perfect
competition

2. Heterogeneous goods sold

• Goods are different from the buyers’ perspective

• Products can be made of different materials and of different
shapes, sizes, colours and designs
• However, these goods are similar

3. Free Market Entry

• Sellers can freely enter the market without any restriction

4. Imperfect market information

• Neither sellers nor buyers have complete knowledge about the

market
• Although sellers and buyers can obtain information through
advertisements and company websites, they are not fully
informed with all market information

Sellers’ behavior:

a) Price searching

• Sellers are price searchers, they can adjust its selling price
• Since product are heterogeneous and market information is
imperfect,
• Sellers will not lose all their buyers even if they raise their
price

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 b) Engaging in both price and non-price competition

• Sellers may offer special prices (Price competition) to attract

customers
• Since goods are heterogeneous, non-price competition such as
advertisement will also be carried out to attract customers

Example 3:

In Hong Kong, there are a lot of medical services

centres. Different doctors will provide medical
services to patient.

Is the market of medical services under

monopolistic competition?

Features: Yes/No Reason

Large number of
sellers?

Free entry to the

market?

Homogenous product?

Perfect information?

Therefore, the market of medical services is/is not an example of

monopolistic competition.

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6 Oligopoly

An oligopoly refers to a market structure in which there are a few sellers

(known as oligopolists) dominating a market.

Features:

1. Several sellers dominating the market

• There may be many sellers but only few of them dominate the
market
• Several sellers occupy most of the market share

2. Heterogeneous goods sold

• Goods are different from the buyers’ perspective

• Same good sold in different supermarket can be regarded as
heterogeneous goods as the location and the services
accompanied are different

3. Imperfect market information

• No buyers and sellers have complete market information

• Sellers and buyers may obtain some information through
different channels
• However, they are not fully informed with market information

4. Possible restriction when sellers enter the market

• There may be barriers such as government regulation or huge

capital/ technological requirement
• Since existing dominant sellers occupy most of the market
share, new sellers have to incur extra cost to compete for
market share

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Sellers’ behavior:

a) Price Searching

• Sellers sell heterogeneous goods and market information is

imperfect
• Each dominant seller has some influence in the market, they can
charge their own price

b) Interdependence of firms

• Sellers will pay close attention to other competitors’ behaviours

• They will take their competitive strategies as reference so as
to make appropriate response

For example, when an oligopolist cuts its price, other firms may
follow and that can lead to a price war with the profits of the
oligopolist being reduced

c) Price Rigidity

• The interdependence of firms leads to price rigidity

• Whenever a firm changes its price, its competitors will most
likely follow
• Sellers tend to maintain the price of goods at a certain level

d) Non-price competition is common

• Oligopolists seldom change their prices, they often compete by

non-price means

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7 Monopoly

A monopoly refers to a market structure in which there is only one seller

in the market.

Features:

1. Only one seller in the whole industry

• Only one seller in the market, known as monopolist

• Its degree of competition is the lowest

2. Market entry barrier

• The market allows no entry of new sellers

• New seller finds it extremely difficult to enter the market

3. Heterogeneous goods sold

• Monopolist sell heterogeneous goods

• Monopolist still need to face competition from other
substitutes

For example, Hongkong Post provides heterogeneous mail services

to customers, such as air mail and surface mail services.

4. Imperfect market information

• Potential sellers and buyers have imperfect market information

• Monopolist can control the flow of information more easily
• They tend to keep important market information confidential

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Seller’s behavior:

a) Price Searching

• Their goods have no close substitutes. Even if the prices of

their goods rise, buyers still have to buy from monopolist

• Being the sole seller, a monopolist can determine price charged

b) Presence of competition

• Monopolist still have to face competition from other substitutes,

they may have to boost sales through price competition

• Non-price competition such as advertisement will also be

carried out to attract buyers

c) Other competition in monopoly

• A monopolist has to compete with others for the right to be the

sole seller in the market (i.e. The monopoly right)

For example, Now TV owns the live broadcasting right for the
Premier League

• Monopolist has to compete with producers using similar factors

of production for resources

Example 5:

There are two companies in the electricity market in Hong Kong. Please
identify the market structure of the electricity market.

_______________________________________________________

_______________________________________________________

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7.1 Sources of monopoly Power

a) Natural Monopoly

• The market cannot have more than one seller

• Some industries involve huge set-up costs such as electricity
and fresh water supplies

For example, the firm invests heavily in constructing electricity

generating facilities and electrical grids

• Because of the huge set up cost, an existing firm may be able to

produce at a much lower average cost than potential entrants

b) Ownership of important resources

• A firm may own all reserves of an important resource

• Other sellers may be unable to produce that good

c) Legal Restriction

• There may be legal restrictions discouraging potential entrants

from entering the market

Legal restrictions include:

Franchise Patent Copyright

• The exclusive • The exclusive • A right granted

right for owners rights for automatically to
to provide inventors to the owner of an
particular goods provide his or her original work to
invention make exclusive
use of the work

d) Government Ownership

• Some industries are solely owned by the government

• Private firms are not allowed to enter the industry

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 e) Collusive agreement or integration

• When the sellers in a market collude to restrict output and

raise the prices together, they can be regarded as cartel and
become a monopolist

• When a firm takes over all other firms in an industry, it

becomes a monopoly

8 Conclusion

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