Business EnvironmentLO 1: MARKET STRUCTURES

SESSION 09 : 17/11/2016

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

Thank You!