5/8/2015

Market Structure

• Characteristic of the Market

Market Structures • They are

Lecture 9 • Number of firms

• Nature of competition

• Pricing in the market

• barrier to entry of firms to the market

Perfect Competition
Types of Market Structures
• Competition is at the highest level
• Perfect competition • There are no barriers to enter or exit the market

• Monopoly • Produce homogeneous and identical products

• Very large number of firms in the market

• Monopolistic Competition
• No government rules and regulations
• Oligopoly
• Buyers and sellers have perfect knowledge on price, utility, quality
and production methods of products

Examples of Perfect Competition Markets

Perfect Competition
• Profit maximization; MR = MC = P
• Firms are price takers
• In short run, firms can earn profits or losses
• Log run economic profits are zero
• Firms earn just to offset their opportunity cost
• Agricultural markets
• have a large number of vendors selling fruit, vegetables, and poultry
• prices of goods are competitive
• Consumers are free to pick any seller, depending upon their choice.
• Free software
• software developers are free to enter and exit the
• Street food
• products are homogeneous in nature
• Consumers are free to make purchases at any vendor they prefer
• entry/exit barriers for sellers are non-existent

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Economic Loss

Monopoly Reasons for Monopoly Firms

• Single supplier in the market • Exclusive knowledge in production

• Availability of patents for product or the production process
• There are no close substitutes for the product
• Government licensing
• There are barriers to enter the market

• Higher profits • Examples for monopoly firms

• Water board
• Electricity board

Types of Monopolies
Controlling Monopoly
• Natural Monopoly
• If the supply of the commodity is localized in a single place • Government tax
• Water, electricity • Per unit tax
• Ad volrum tax
• Legal monopoly
• Firms have legal right to produce • Government Subsidies

• Public monopoly
• Government regulations
• Owned by the government

• Private monopoly
• Owned by private organizations, Ceylon tobacco

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Short Run Equilibrium Monopolistic Competition

• Profit of monopoly firm maximizes in short run if; • many competitors, but each one sells a slightly different product
• MC = MR
• At the intersection point Slope pf MC > Slope of MR • Each firm makes independent decisions about price and output,
based on its product, its market, and its costs of production
• Equilibrium Price & Output
• Output; MC = MR • Knowledge is widely spread among participants, but it is unlikely to
• Price found from demand curve
be perfect
• Example – dining in a restaurant

• More innovative

Oligopoly
Monopolistic Competition
• Market is dominated by small number of firms
• Free to enter and exit the market • They can set prices
• Barriers to entry is high
• High advertising
• Product may be homogeneous or differentiated
• Examples
• Toothpaste • Oligopolies have perfect knowledge on cost
• Hotels, pubs and restaurants • Buyers have only imperfect knowledge as to price, quality
• Examples
• OPEC, Accountancy market (PWC, KPMG, E&Y), food processing
companies (Kraft, Nestle)

Basic concepts in Oligopoly Kinked Demand in Oligopoly

• Cartel • Describes a situation where a strong
• Firms operate with a formal agreement to fix prices and output
interdependency exists among firms within an
• OPEC
industry

• Collusion • A firm's demand curve tends to be elastic above

• Informal agreement among firms in an industry to fix prices and output
• Price Leadership
• One firm establishes as an industry leader and all other firms in the industry
accept its pricing policy
equilibrium price as price increases are not
followed by competitors
• A firm's demand curve tends to be inelastic below
equilibrium price as price decreases must be
followed by competing firms.