Market Structure Overview

Why study market structure?

Every firm exists to maximize profits.

PROFITS = TR – TC

TR = P X Q
Each firm must set the profit maximizing P and Q.

1. To set the profit maximizing P and Q, each firm must understand the characteristics of
the market structure that it is operating in.

2. Then it can set the profit maximising P and Q.

3. Is the market structure good for society even though a firm can make profits?

4. Are there special features in each market structure?

1. ASSUMPTIONS / CHARACTERISTICS
- What are the assumptions?
- Compare the assumptions

Perfect Monopoly Monopolistic Oligopoly

Competition Competition
1 No of firms Many Sole/ only 1 Many Few large
sellers

2 Type of product Homogeneous Unique/ Differentiated Homogeneous

Differentiated
No substitute

3 Entry barriers No Yes No Yes

4 Pricing Price taker Price maker Price maker Price maker

5 Perfect Information Yes No No No

2. PROFIT MAXIMISATION
Price and Quantity decision

Perfect Monopoly Monopolistic Oligopoly

Competition Competition
A Pricing
1 Demand curve Horizontal Downward Downward Downward
Perfectly sloping sloping. sloping.
elastic More elastic Kinked
than monopoly
2 Market power Price taker Price maker Price maker Price marker

3 Price and revenue P=MR P>MR P>MR P>MR

B Quantity MC =MR MC =MR MC =MR MC=MR

P = MC

3. IS THE MARKET STRUCTURE GOOD FOR SOCIETY?

Perfect Monopoly Monopolistic Oligopoly

Competition Competition

1 Allocative efficient Yes. NO NO NO

P=MC P>MC P>MC P>MC

2 Productive efficient Yes. No. No. No.

P=min ATC P>min ATC P>min ATC P>min ATC

4. SPECIAL FEATURES

1. PC - SHUTDOWN RULE (P < AVC)

2. MONOPOLY - ENTRY BARRIERS

- PRICE DISCRIMINATION

3. MC - PRODUCT DIFFERENTIATION

4. OLIGOPOLY - INTER-DEPENDENT RELATIONSHIP

- COLLABORATION