MARKET STRUCTURE
Chapter #23
Presented by: Ms. SUMMERINA WASIM
Market structure:
It is the term for the conditions which exist in the market.
Competitive Market: (characteristics/ features)
More buyers and sellers in the market.
Free entry and exit in the market.
Each firm will receive a small share of the market
There are close substitutes
Behaviour of competitive market:
Pressure for firms to keep their prices low.
They respond quickly to changes in consumer demand.
They earn normal profits.
If the demand of the product increases they will be able to earn
higher profit or supernormal profit/ abnormal profit.
They can also experience market loss. This will force some firms
to leave the market.
Performance of competitive markets:
Competition in the market promote efficiency.
Respond more quickly to the consumers’ demand to earn high profits.
If they are able to produce a product at a lower possible cost then they
give “price competition” to the rivals firms.
If a firm is producing a good quality product at a lower price then it
gives “non-price competition” to the rival firms.
High level of competition may drive down to a level which covers the
cost only.
Monopoly Markets: (characteristics/features)
A sole supplier of a product.
The firm is the industry. It has a 100% share of the market
There are high barriers to entry or exit, making it difficult for other
firms to enter the market.
A monopoly is a price maker. Its output is the industry’s output and
so changes in its supply affect the market price.
Why do monopolies arise?
A monopoly may develop over time.
Firm is successful in cutting down its cost.
Quick to respond on consumer tastes and driven out the rival firms.
Successful in capturing the whole market.
Mergers and take overs can also convert the number of firms into
one firm.
It can exist from the start. And have the support of the government.
A patent (law) would also stop other firms from producing the
product.
Why do monopolies continue?
One type of barrier is a legal barrier;
1. Patent (law)
2. Government act
Second is the scale of production;
1. Large-scale production
2. Low unit cost
3. Difficult to compete and expensive to set up a new firm.
Third is creation of brand royalty;
1. Through advertisement
2. Access to retail outlets
3. Easy access to resources
Fourth is barriers to exit;
1. Long-term contracts to provide a product
2. Some firms find it difficult and reluctant to enter the market
3. A significant barrier to exit is the existence of sunk costs.
Sunk cost: A cost that cannot be recovered if the firm leaves the
industry e.g advertising and industry specific equipments.
Behaviour of a monopoly:
Monopoly can earn supernormal profits in the long run.
A monopoly has control over the supply of the product.
Price
P1
0 Q Q1
Quantity
Disadvantages of a monopoly:
Monopolies are often criticised.
Absence of competition may lead to inefficiency.
They have the authority to push up the prices by restricting the
supply of the product.
They can produce poor quality products
Not very much conscious about the changes in consumer’s demand
and taste.
Advantages of a monopoly:
Some monopolies, because of their size and ability to earn high
profits, can benefit consumers.
Examples are;
It may be more efficient than smaller firms in supplying the same
product (large-scale of production).
A monopoly may still face competition from firms overseas or
from firms selling the same products.
A monopoly may offer competitive prices to maintain their status
in the market.
They also continue to produce high quality products to protect its
dominant market position.
Without abnormal profits many monopolies would not have the
incentive or the money they need to fund large, risky investments
in new inventions and the development of better products.