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Transcript of Business Environment - bms.lkbms.lk/download/HND/B-BE/Himashi/week 8/HND-BE-LO1-SE...
Introduction to market structures
KEY CONCEPT
A market structure is an economic model that helps economists examine the
nature and degree of competition among businesses in the same industry.
WHY THE CONCEPT MATTERS
The level of competition in a market has a major impact on the prices of products.
The more sellers compete for your dollars, the more competitive prices will be.
Four basic market structures exist and these are distinguished based
on:
Number of producers and consumers
Amount of business each company does within the market
Types of products being traded
Amount of information made available between companies and consumers
Introduction to market structures
Four different market structures are:
Perfect competition
Monopoly
Monopolistic
Oligopoly
Introduction to market structures
01. PERFECT COMPETITION
Perfect competition describes a market where there are many small firms
producing homogeneous goods.
01. PERFECT COMPETITION-CHARACTERISTICS
Characteristic 1: Many Buyers and Sellers
No one buyer or seller has power to control price in the market
Many sellers means buyers can choose a producer with better price
Many buyers means sellers can all sell product at market price
01. PERFECT COMPETITION-CHARACTERISTICS
Characteristic 2: Standardized Product
Standardized product—one producer’s product is identical to another’s
Perfect substitutes include
agricultural products, such as wheat, eggs, milk
basic commodities, such as notebook paper, gold
Price is only basis for consumer choice
01. PERFECT COMPETITION-CHARACTERISTICS
Characteristic 3: Freedom to Enter and Exit Markets
Producers can enter market when profitable and exit when unprofitable
Regulations do not restrict businesses from entering or exiting
Characteristic 4: Independent Buyers and Sellers
Neither buyers nor sellers join together to influence price
Supply and demand set the equilibrium price
Independent action ensures that market stays competitive
01. PERFECT COMPETITION-CHARACTERISTICS
Characteristic 5: Well-informed Buyers and Sellers
Buyers can compare prices
Sellers know what competitors charge, what buyers willing to pay
Price taker—seller that accepts market price set by supply and demand
02. MONOPOLY
Monopoly occurs if there is only one provider for a product. It is
considered for a monopoly market structure there will not be any
substitutes.
E.g. Waterboard in Sri Lanka, Sri Lankan postal services
02. MONOPOLY-CHARACTERISTICS
Characteristic 1: Only One Seller
Single business controls supply of product without close substitutes
De Beers cartel controlled diamond market in 20th century because
produced over half of world’s diamond supply
bought up diamonds from smaller producers to resell
02. MONOPOLY-CHARACTERISTICS
Characteristic 2: A Restricted, Regulated Market
Government regulations allow single firm to control market
De Beers worked with South African government
restricted access of other producers
controlled supply of diamonds
Characteristic 3: Control of Prices
Monopolists can control prices because there are no close substitutes
During economic downturns, De Beers created artificial shortage
by withholding diamonds from market, kept prices higher
Types of monopolies
Natural monopoly—cost of production lowest with only one producer
Government monopoly—government owns and runs or permits only one producer
Technological monopoly—one firm owns invention, technology, method
Geographic monopoly—no other sellers within a region
Types of monopolies
Example 1: Natural Monopoly: A Water
Company
In some markets, inefficient to have
companies competing
Example: public utilities that require
complex systems
economies of scale—average
production cost falls as production
grows
Government both supports and
regulates
Example 2: Government Monopoly: The Postal
Service
Government runs some businesses that provide
goods and services
private firms cannot or do not want to provide
because of low profits
Example: Postal Service has sole right to deliver
first-class mail
New services and technologies now compete
private delivery companies, fax, e-mail, online bill
paying
Types of monopolies
Example 3: Technological Monopoly:
Polaroid
Patent—legal registration of invention;
gives inventor sole rights
enables businesses to recover costs of
development
Monopoly lasts for time limit of patent or
until substitute invented
Patent let Polaroid keep Kodak out of
instant-photography market
simpler cameras, digital cameras, quick
processing reduced its market
Example 4: Geographic Monopoly:
Professional Sports
Sports leagues tie teams to cities,
regions; limit number of teams
owners can charge high ticket prices, sell
team merchandise
Physical isolation—no other supplier in
area—lets owner control prices
Very small market may not support two
businesses of same type
Profit maximisation by monopolies
KEY CONCEPTS
Monopoly cannot set prices too high
faces downward-sloping demand curve
raises equilibrium price by producing less than competitive market would
Most countries have laws to prevent monopolies
EXAMPLE: Drug Manufacturer
Drug companies maximize profits during patent period
afterwards, others market cheaper generic versions
Schering-Plough strongly marketed non-drowsy antihistamine Claritin
made up to $3 billion per year worldwide with patent
after patent ended sales dropped to about $1 billion per year
03. MONOPOLISTIC COMPETITION
Most real markets fall between perfect competition and monopoly
Monopolistic competition—many sellers offer similar products
one of most common market structures
product differentiation—sellers try to distinguish their products from similar ones
Differentiation can be based on quality, features, design, sales promotions, advertising, customer
knowledge, availability.
nonprice competition—use factors other than price to attract customers
MONOPOLISTIC COMPETITION
Gap Levis Licc
Are these shampoos/conditioners different?
Pantene $14.50 Frederic Fekkai
$54
MONOPOLISTIC COMPETITION-CHARACTERISTICS
Characteristic 1: Many Sellers and Many Buyers
Many sellers and many buyers
fewer sellers than perfect competition but enough for true competition
Each seller chooses product to make, amount to make, price to charge
examples include T-shirts, batteries, hamburger restaurants
Characteristic 2: Similar but Differentiated Products
Consumer loyalty gained with unique product or apparent difference
Sellers use market research to decide how to differentiate product
Chains use sophisticated techniques—learn consumer lifestyles, tastes
focus groups—moderated discussions with small groups of consumers
survey large numbers of consumers
MONOPOLISTIC COMPETITION-CHARACTERISTICS
Characteristic 3: Limited Control of Prices
Differentiation gives producers limited
control of prices
low price distinguishes some products
name brands or better quality priced
higher
Consumers pay extra if they perceive
important enough difference
will switch to substitute if price goes
too high
Characteristic 4: Freedom to Enter or Exit Market
No great barriers to entry in monopolistically
competitive markets
when firms earn profit, other firms enter and
increase competition
competition can be difficult for small businesses
against large ones
Some firms start to take losses
signal that it is time to exit the market
04. OLIGOPOLY
Oligopoly—market structure with only a few sellers offering similar
product
Less competitive than monopolistic competition
each firm has large market share—percent of total sales in the market
Few firms due to high start-up costs—expenses of entering market
04.OLIGOPOLY EXAMPLE
Coca-Cola Classic Coca-Cola classic
Sprite
Dasani
Barq's
Dannon
Nestea
Rockstar
Evian
Fanta
Fresca
Minute Maid
Mr. Pibb
Powerade
Seagrams Ginger Ale & Mixers
TAB
Pepsi-co
Aquafina
Pepsi
Mountain Dew
Sierra Mist
Sobe
Lipton Brisk Tea
MUG Root Beer
Slice
Gatorade
Dole Juice
Tropicana
04.OLIGOPOLY CHARACTERISTICSS
Characteristic 1: Few Sellers and Many Buyers
A few firms dominate market
industry is oligopoly if four firms control 40 percent of market
Sri Lankan biscuit market: Munchee and Maliban, Sri Lankan Gas providers: Laughs and Shell
Characteristic 2: Standardized or Differentiated Products
Many industrial products are standardized such as cement
firms differentiate by brand name, service, location
Many consumer goods are differentiated
use marketing strategies, such as focus groups, surveys
create brand-name products that can be marketed widely
04.OLIGOPOLY CHARACTERISTICSS
Characteristic 3: More Control of Prices
Each firm’s decisions about supply and price affect entire market
If one firm lowers prices, others probably will too
no firm gains market share from price drop; all risk losing profits
If one raises prices, others may not in order to gain market share
Anticipate competitors’ response to price, output, marketing changes
04.OLIGOPOLY CHARACTERISTICSS
Characteristic 4: Little Freedom to Enter or Exit Market
High start-up costs—such as factories, warehouses—make entry hard
new firm may sell on small scale; hard to compete with established ones
Established firms have resources, patents, economies of scale
High investment by firms in oligopoly make exit difficult
operations too vast, complex to sell and reinvest easily