Introduction to Introduction to market structure market structure

modelsmodels

Learning outcomes

Understand the

characteristics of market structure

Understand how firm

behaviour is affected by

market structure

Define the four market

structures

Explain and give examples of

barriers to entry

Market structureMarket structureThe markets in which firms operate differ in the degree of competition and in their structure

We can think of there being a spectrum of competition, from very competitive to a total absence of competition.

Along this spectrum we can identify FOUR market structures

Perfect Monopolistic Oligopoly Monopolycompetition competition

Market structure Market structure characteristicscharacteristics

Characteristic

Perfect competition

Monopolistic competition

Oligopoly Monopoly

No. / size of firms

Nature of product

Barriers to entry

Examples

Characteristic

Perfect competition

Monopolistic competition

Oligopoly Monopoly

No. / size of firms

Large no. of small firms

Large no. of small firms

Small no. of large firms

One (theory)> 25% mkt share (CC)

Nature of product

Barriers to entry

Examples

Market structure Market structure characteristicscharacteristics

Characteristic

Perfect competition

Monopolistic competition

Oligopoly Monopoly

No. / size of firms

Large no. of small firms

Large no. of small firms

Small no. of large firms

One (theory)> 25% mkt share (CC)

Nature of product

Identical Differentiated Differentiated No substitutes

Barriers to entry

Examples

Market structure Market structure characteristicscharacteristics

Characteristic

Perfect competition

Monopolistic competition

Oligopoly Monopoly

No. / size of firms

Large no. of small firms

Large no. of small firms

Small no. of large firms

One (theory)> 25% mkt share (CC)

Nature of product

Identical Differentiated Differentiated No substitutes

Barriers to entry

None None High High

Examples FarmingFOREX

Road haulage?

Road haulage?Air transport (EU)Air transport (domestic)Bus market (national)

RailtrackTOCs (regional / route franchises)London BusesBus market (regional / local)

Market structure Market structure characteristicscharacteristics

Task 1

Use pp129 – 130 and p34 to identify and explain 7 barriers to entry which might prevent potential competition entering an industry.

If possible, give a transport example of each barrier.

Implications for Implications for behaviourbehaviourPerfect competition

Monopolistic competition

Oligopoly Monopoly

Perfect competition

Monopolistic competition

Oligopoly Monopoly

Price takersMust be cost efficientNo scope for branding or marketingLow profit margins

Implications for Implications for behaviourbehaviour

Perfect competition

Monopolistic competition

Oligopoly Monopoly

Price takersMust be cost efficientNo scope for branding or marketingLow profit margins

Some control over priceMust be cost efficient in absence of unique selling pointGains from product differentiationLow profit margins

Implications for Implications for behaviourbehaviour

Perfect competition

Monopolistic competition

Oligopoly Monopoly

Price takersMust be cost efficientNo scope for branding or marketingLow profit margins

Some control over priceMust be cost efficient in absence of unique selling pointGains from product differentiationLow profit margins

Little competition on priceHigh overheadsHigh profit marginsHeavy branding, promotion and differentiationPossibility of collusion

Implications for Implications for behaviourbehaviour

Perfect competition

Monopolistic competition

Oligopoly Monopoly

Price takersMust be cost efficientNo scope for branding or marketingLow profit margins

Some control over priceMust be cost efficient in absence of unique selling pointGains from product differentiationLow profit margins

Little competition on priceHigh overheadsHigh profit marginsHeavy branding, promotion and differentiationPossibility of collusion

Price makerHigh profit marginsDegree of cost inefficiency through ‘slack’Potential to ‘abuse’ market powerAnti-competitive behaviour

Implications for Implications for behaviourbehaviour

Efficient market structures

An efficient market structure must be

allocatively efficient (P=MC)

productively efficient (min AC)

An efficient marketAn efficient marketP

rice

Pri

ceMarket Typical

Firm

Quantity Quantity

D

S

PP=AR=MR

MCAC

Measuring degree of competition

Concentration ratios

market share accounted for by largest 3, 5 or 7 firms

Task 2

Answer the following questions from the specimen paper

(a) (i)

(a) (ii)

(b) (i)

(b) (ii)