Market Structure

Market Structure
 The amount of competition that exists in a
market between producers
 Perfect Competition
 Monopoly
 Oligopoly
 Monopolistic Competition
 Perfect Competition
 So many buyers and sellers in the market, no one
of them can influence price
 Homogeneous goods - 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
 Perfect Competition:Price
Determination
 Normal profit- minimum level of profits in order to stay in
business
 Abnormal profits – profits over and above normal profits
 Firms will decide what level of output to produce by
setting the cost of producing the last unit of good equal to
the revenue gained from selling the last unit (marginal cost
= marginal revenue)
 In perfect competition, as firms have perfect knowledge,
abnormal profits are unsustainable in the long run
 Example of Perfect
Competition
 Closest example is a fruit and vegetable
market
 Monopoly: Characteristics
 Has market power, and can decide price OR
quantity sold (not both)
 Either no substitutes for the goods, or high
barriers to entry
 Monopolist may use price discrimination
 Price Discrimination
 Consumers pay different prices for the same
good
 Can occur when:
the producer is monopolistic and able to
control supply
there are groups of consumers with different
demand conditions
able to separate the groups
 Oligopoly
 A small number of producers supply a
market in which the product is
differentiated in some way
 Oligopoly Characteristics
 High interdependence between firms
 A lack of price competition in the market
 Lack of price competition leads to different forms of non-
price competition taking place, such as branding and
advertising
 Price is determined by a price leader or by collusion
 High barriers to entry
 Products could be highly differentiated – branding or
homogenous
Examples of oligopolistic structures
 Supermarkets
 Banking industry
 Chemicals
 Oil
 Medicinal drugs
 Broadcasting
 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
 Monopolistic Competition
 Monopolistic competition exists when all
conditions for perfect competition exist
except for homogeneous goods
 Goods are slightly different in some way
(technical or economic)
 Abnormal prices may exist in the short-term
but cannot last for a long-time
 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.
Thank You