Chapter 1-part 2

TYPES OF MARKET
STRUCTURE IN THE
CONSTRUCTION INDUSTRY
Monopolistic Competition

 It occurs where there are a large numbers of

manufacturers whose products are close but not perfect
substitutes.
 For example, a brick manufacturer A has produced a new
type of brick which offer better quality than the normal
bricks.
 This company might earn above normal profits but only for
a short while, because other firms in the market will
respond by producing similar products.
 This keeps the market very competitive.
Monopolistic Competition

 Second example, a novel by an author is a monopoly of his

own novels.
 However, he is also competing against all the other novels
by different authors in the market; thus, there is also a
certain degree of perfectly competitive market.
 If the price of a novel increased, customer may choose to
read other novels, or for fans of that novel may still remain
to support that novel even the price of that novel is high.
 Monopolistic competition is close to perfect competition,
except that the products are not homogeneous but
individual.
Oligopoly
 This type of market structure is very close to perfect
monopoly, where there are only a few suppliers, and each
commands a significant market share.
 In this kind of market, each firm has enough power to
avoid being a price-taker but they are still subject to a
sufficient amount of competition to know the market is not
entirely under their control.
 Therefore, the firms will price their products according to
how they think competitors will react, which lead them to
the dilemma of not knowing whether to compete or co-
operate
Oligopoly
 As there are limited suppliers in the market, if one supplier
reduces price, then the others have to follow in order not to
lose sales.
 However, the firm can make more profits if they agree to
co-operate as a group.
 When firms agree to co-operate to raise profits it is called
collusion.
 This is very common practice across the whole breath of
the construction.
Oligopoly
Characteristics of Oligopoly market structure:
1. There are very few firms
 They know each other well enough to understand that one of
them cannot gain sales without inducing retaliation.
 So some agreement to co-ordinate their policies may be reached.
2. The firms produce similar products
 As a result, it is difficult to gain a specific advantage in the
market.
 In such situation, firms may prefer some form of joint effort in
preference to the cut-throat behaviour necessary to take
customers away from each other.
Oligopoly
Characteristics of Oligopoly market structure:
3. There are a dominant firm
 Other firms may look to the dominant one for its judgement
about market conditions and takes its lead on prices.
 In short, the dominant firm becomes a reference point and the
focus for tacit agreement.
4. The firms have very similar average costs
 In this case it is unlikely that firms will enter into price
competition.
 Rivalry could break out in other forms, unless some joint
agreement is reached to maximize profits.
Oligopoly
Characteristics of Oligopoly market structure:
5. New entries face significant barriers to entry
 The theory of perfect competition suggests that high profits in
an existing market will attract new entrants and, as a result,
prices and profits reduce.
 This profit-damaging activity is less likely to occur if some
agreement between the existing firms has been made to prevent
other firms breaking into the market.
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