MAC601 Market Structures November 19 Michelle Cecilio

8/3/2019 MAC601 Market Structures November 19 Michelle Cecilio

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An Introduction, November 19, 2011MARKET STRUCTURES

Friday, May 04, 2012 1Prepared by: Michelle Cecilio


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Scope of the reportMarket Structures A definition

Overview of the different marketstructures and their examples



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NOTE:The following topics will be discussed in detail in

another report.

Perfect Competition

Monopoly

Friday, May 04, 2012 Prepared by: Michelle Cecilio 3


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Market StructuresThe interconnected characteristics of amarket, such as the number and relative

strength of buyers and sellers and degree ofcollusion among them, level and forms ofcompetition, extent of product

differentiation, and ease of entry into and exitfrom the market.



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Simple Illustration

MARKET

# ofMarketPlayers

Barriersto entry

Pricecontrol &Marketpower

Supply



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Factors affecting market structures

Number of firms/market players and

Competition Price control and Market Power

Supply

Barriers to entry



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4 Basic Types

1. Perfect Competition

2. Oligopoly

3. Monopoly

4. Imperfect Competition



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Illustration



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PERFECT COMPETITIONIn the perfect or pure competition market, there are alarge number of firms each producing the same product(as called a standardized or homogeneous product).Since the number of firms is very large, no one firm caninfluence the market price, thus each firm has nomarket power and each is a price taker. We also assumethat there is perfect information, meaning everyoneknows what price is being charged in all markets. Thebarriers to entry are low, so it is easy for other firms toget into or out of the market.



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PERFECT COMPETITION1. Large number of market players

2. Standardized or homogenous products

3. No influence or control on pricing ofproducts

4. Availability of information5. Barriers to entry are low



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Examples of Perfect Competition Agriculture products market (farm

produce/staple goods like grains and

veggies) ex: Wheat, Corn Consumer goods and durables

Note perfect competition is an absolute concept. Examples providedare those that are closest/best illustrate this structure.



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OLIGOPOLYMarket form in which a market or industry isdominated by a small number of sellers.

There are significant barriers to entrywhich limit the number of firms that canenter the market often due to the cost

structure of the industry. Since there are onlya few firms, the market power of a firmdepends on the actions of the other firmsin the industry.



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OLIGOPOLY Industry dominated by small number of large

firms High barriers to entry (high ind. Costs) Products could be highly differentiated

branding vs. homogenous Price stability within the market

Potential for collusion Abnormal profits High degree of interdependence between firms



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Measuring OligopolyConcentration ratio the proportion of

market share accounted for by top X

number of firms:E.g. 5 firm CR of 80% - means top 5 five

firms account for 80% of market share

3 firm CR of 72% - top 3 firms account for72% of market share



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Examples - Oligopoly1. Wireless Communications PLDT (now

owns 51.55% of Digitel) and Globe Telecom

2. Oil OPEC; Caltex, Petron, Sea Oil, Shell3. Air transportation PAL, Cebu Pacific,

Zest Air, AirPhil Express

4. Broadcasting ABS-CBN, GMA and TV5



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QUICK QUESTION

Do you agree that the PhilippineBanking industry is anOligopoly? Please comment.



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MONOPOLYA situation in which a single company orgroup owns all or nearly all of the market

for a given type of product or service. Bydefinition, monopoly is characterized byan absence of competition, which often

results in high prices and inferiorproducts.



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MONOPOLY

1. There is a single seller.

2. There are no close substitutes for

the firms product uniqueproduct (control on quantity)

3. There are barriers to entry (highcosts)

4. Market power (price maker)Friday, May 04, 2012 Prepared by: Michelle Cecilio 18


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ExamplesPublic Utilities:

1. Power Distribution MERALCO,VECO (geographic)

2. Water MCWD

Public Railway:1. MRT

2. LRTFriday, May 04, 2012 Prepared by: Michelle Cecilio 19


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IMPERFECT COMPETITIONCompetitive situation in any marketwhere the conditions necessary forperfect competition are notsatisfied. It is a market structure that

does not meet the conditions ofperfect competition.



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IMPERFECT COMPETITION1. Monopoly

2. Oligopoly

3. Monopolistic Competition

4. Monopsony - Monopsony is a state in which demand comes fromone source. If there is only one customer for a certain good, that customer has a monopsony

in the market for that good

5. Oligopsony - Similar to an oligopoly (few sellers), this is a market inwhich there are only a few large buyers for a product or service. This allows the buyers toexert a great deal of control over the sellers and can effectively drive down prices.



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MONOPOLISTIC COMPETITIONMonopolistic competition is imperfectcompetition where many competing

producers sell products that aredifferentiated from one another (that is,the products are substitutes but, because

of differences such as branding, notexactly alike)



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Major characteristics1. Product differentiation (branding)

2. Many firms

3. Free entry and exit in the long run

4. Independent decision making

5. Market Power (due to differentiation)6. Buyers and Sellers have perfect

informationFriday, May 04, 2012 Prepared by: Michelle Cecilio 23


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MONPOLISTIC COMPETITION Each firm may have a tiny monopoly

because of the differentiation of their

product Firm has some control over price



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ExamplesRestaurants: (Japanese vs. American; Pasta vs. Grilled

products)

Rai-Rai Ken vs. Joeds Lutong Hapon (JapaneseCarenderia)

Donuts:

Krispy Kreme vs. Dunkin Donuts

Professions: Assurance (Audit and Consultancy)

Sycip Gorres Velayo & Co., vs. small practitioners (basedon professional fees)

Bakery/Pastry Shop:

Pan de Manila vs. Julies



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Lets identify the appropriate market

structure for the following:

1. Cable companies

2. Call center industry in Cebu City3. Power transmission company (Transco)

4. Power generation companies in Cebu

City5. Hospitals in Cebu City



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REFERENCES http://tutor2u.net/economics/revision-notes/a2-micro-

market-structures-summary.html http://www.bized.co.uk

http://www.businessdictionary.com/definition/market-structure.html http://www.philequity.net/uploadedfile/20110613163427146

_Philequity%20Corner%20-%20The%20Philippine%20Banking%20Giants.pdf

http://courses.byui.edu/ECON_150/ECON_150_Presentations/Lesson_07.htm#Section_01_Link_01 http://economics.about.com/od/termsbeginningwithm/g/

monopsony.htm Png, Ivan. Managerial Economics Asia Pacific Edition. 2005

http://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://www.bized.co.uk/http://www.businessdictionary.com/definition/market-structure.htmlhttp://www.businessdictionary.com/definition/market-structure.htmlhttp://www.philequity.net/uploadedfile/20110613163427146_Philequity%20Corner%20-%20The%20Philippine%20Banking%20Giants.pdfhttp://www.philequity.net/uploadedfile/20110613163427146_Philequity%20Corner%20-%20The%20Philippine%20Banking%20Giants.pdfhttp://www.philequity.net/uploadedfile/20110613163427146_Philequity%20Corner%20-%20The%20Philippine%20Banking%20Giants.pdfhttp://courses.byui.edu/ECON_150/ECON_150_Presentations/Lesson_07.htmhttp://courses.byui.edu/ECON_150/ECON_150_Presentations/Lesson_07.htmhttp://courses.byui.edu/ECON_150/ECON_150_Presentations/Lesson_07.htmhttp://courses.byui.edu/ECON_150/ECON_150_Presentations/Lesson_07.htmhttp://www.philequity.net/uploadedfile/20110613163427146_Philequity%20Corner%20-%20The%20Philippine%20Banking%20Giants.pdfhttp://www.philequity.net/uploadedfile/20110613163427146_Philequity%20Corner%20-%20The%20Philippine%20Banking%20Giants.pdfhttp://www.philequity.net/uploadedfile/20110613163427146_Philequity%20Corner%20-%20The%20Philippine%20Banking%20Giants.pdfhttp://www.philequity.net/uploadedfile/20110613163427146_Philequity%20Corner%20-%20The%20Philippine%20Banking%20Giants.pdfhttp://www.businessdictionary.com/definition/market-structure.htmlhttp://www.businessdictionary.com/definition/market-structure.htmlhttp://www.businessdictionary.com/definition/market-structure.htmlhttp://www.bized.co.uk/http://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.htmlhttp://tutor2u.net/economics/revision-notes/a2-micro-market-structures-summary.html


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Thank you!



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ADDITIONAL READING MATERIALS

BEYOND THIS POINT



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Advantages of Perfect Competitiion High degree of competition helps

allocate resources to most efficient use

Price = marginal costs

Normal profit made in the long run

Firms operate at maximum efficiency Consumers benefit



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What happens in a competitive

environment? New idea/Innovation firm makes

short term abnormal profit Other firms enter the industry to take

advantage of abnormal profit Supply increases price falls

Long run normal profit made Choice for consumer



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MONOPOLY

Pure monopoly industry is the firm!

Actual monopoly where firm has>25% market share

Natural Monopoly high fixed costs

gas, electricity, water,telecommunications, rail



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Advantages of Monopoly May be appropriate if natural

monopoly

Encourages R&D Encourages innovation Development of some products not

likely without some guarantee ofmonopoly in production Economies of scale can be gained

consumer may benefit



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MONOPOLYcontd High barriers to entry

Firm controls price OR output/supply

Abnormal profits in long run

Possibility of price discrimination

Consumer choice limited Prices in excess of MC



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Disadvantages of MonopolyExploitation of consumer higher

prices

Potential for supply to be limited -less choice

Potential for inefficiency



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Barriers to entry into marketMonopolies derive their market power from barriers to entry circumstances that prevent or greatly impede a potentialcompetitor's ability to compete in a market. There are three major types of barriers to entry; economic, legal anddeliberate.[4]

Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages andtechnological superiority.[5]

Economies of scale: Monopolies are characterised by decreasing costs for a relatively large range of production.[6]Decreasing costs coupled with large initial costs give monopolies an advantage over would-be competitors. Monopoliesare often in a position to reduce prices below a new entrant's operating costs and thereby prevent them from continuingto compete.[6] Furthermore, the size of the industry relative to the minimum efficient scale may limit the number ofcompanies that can effectively compete within the industry. If for example the industry is large enough to support onecompany of minimum efficient scale then other companies entering the industry will operate at a size that is less thanMES, meaning that these companies cannot produce at an average cost that is competitive with the dominantcompany. Finally, if long-term average cost is constantly decreasing, the least cost method to provide a good or serviceis by a single company.[7]

Capital requirements: Production processes that require large investments of capital, or large research anddevelopment costs or substantial sunk costs limit the number of companies in an industry.[8] Large fixed costs alsomake it difficult for a small company to enter an industry and expand.[9]

Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology inproducing its goods while entrants do not have the size or finances to use the best available technology.[6] One largecompany can sometimes produce goods cheaper than several small companies.[10]

No substitute goods: A monopoly sells a good for which there is no close substitute. The absence of substitutes makesthe demand for the good relatively inelastic enabling monopolies to extract positive profits.



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Barriers to entry into marketControl of natural resources: A prime source of monopoly power is the control of resources that are critical tothe production of a final good.

Network externalities: The use of a product by a person can affect the value of that product to other people.This is the network effect. There is a direct relationship between the proportion of people using a product andthe demand for that product. In other words the more people who are using a product the greater theprobability of any individual starting to use the product. This effect accounts for fads and fashion trends.[11] It

also can play a crucial role in the development or acquisition of market power. The most famous currentexample is the market dominance of the Microsoft operating system in personal computers.

Legal barriers: Legal rights can provide opportunity to monopolise the market of a good. Intellectual propertyrights, including patents and copyrights, give a monopolist exclusive control of the production and selling ofcertain goods. Property rights may give a company exclusive control of the materials necessary to produce agood.

Deliberate actions: A company wanting to monopolise a market may engage in various types of deliberateaction to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmentalauthorities, and force (see anti-competitive practices).

In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers toexit are market conditions that make it difficult or expensive for a company to end its involvement with amarket. Great liquidation costs are a primary barrier for exiting.[12] Market exit and shutdown are separateevents. The decision whether to shut down or operate is not affected by exit barriers. A company will shutdown if price falls below minimum average variable costs.



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DUOPOLY

Industry dominated by two large firms

Possibility of price leader emerging rival will follow price leaders pricingdecisions

High barriers to entry Abnormal profits likely



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Is RP banking industry

oligopolistic?



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oligopolistic?Contd



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oligopolistic?Contd.As of 1Q2011, MBT is the biggest bank in the country interms of Assets and Equity. BDO is a very close 2nd in

terms of Assets, but it still is the countrys biggest lender.Though BPI is behind MBT and BDO in terms of size, ithas the highest Market Capitalization among the 3.Collectively, MBT, BDO and BPI are referred to as the

Big 3. They offer a comprehensive suite of products totheir customers and are often market share leaders inthe businesses that they enter.

Documents

MAC601 Market Structures November 19 Michelle Cecilio