CHAPTER FOUR
MEASUREMENT, DETERMINANT, PRONE AND CONS OF
MARKET POWER
❖ Introduction; Brief Review of Determinants of Market Structure
➢ Definition of market structure
• It is the pattern or form or manner in which the different constituent parts (i.e. sellers and
buyers) of that body are arranged/ linked/ together.
• It is the characteristics of the organisation and composition of a market that exercises a
strategic influence on the nature of competition and pricing within the market.
• It is the result of actions and interactions of individuals and organizations: firms, other
business organizations & public bodies.
➢ Determinants of market structure
1. Market Concentration: number of buyers and sellers of a specific market/industry and
size/power/ structure. (As discussed in the earlier chapters)
2. The degree of product differentiation: It indicates the extent to which a seller has some
degree of independence (i.e. some market power) in pricing and other marketing
decisions. (This will be addressed in the upcoming chapters)
3. The Condition of Barriers to Entry & Exit to/from the Market:
4. The degree of vertical integration with suppliers
5. Economies of Scale; and so, on
➢ Entry Barriers
• An entry condition shows the relative ease with which new firms can join the category
of sellers (i.e. firms) in the market.
• Without entry barriers then even the most complete monopoly is open to competition
from new entrants.
• Concentration must be considered in relationship to level of barriers to entry and exit.
– High concentration but with low entry and exit barriers may result in close to competitive
pricing due to threat of entry.
– In actual fact, more concentrated industries are marked by significant barriers to entry
and exit.
❖ Types of Barriers to Entry
1. Entry conditions help explain the number and size distribution of firms that operate in a
market.
➢ So, entry conditions affect conduct and performance in their own right.
2. Types of entry Barriers may include:
▪ Government policies;
▪ Economics of Scale & Natural Monopolies
✓Large Initial Capital Requirement
▪ Market/business strategies of firms with the aim of deterring new entry.
➢ Government Policies & Practices
1. Monopolies are often established by governments;
✓ E.g. Governments grant monopolies or exclusive franchise for electric, telecommunication,
water and other utility services.
2. Governments grant patents: Meant to encourage inventions & Innovations by
protecting innovators & inventors.
✓ Governments grant inventors exclusive right to use their discoveries for certain period of
time (e.g. 17 years for patents) patents increase market concentration & reduce competition.
3. Government regulations in the form of licensing requirements restrict entry.
✓ E.g. Licensing requirements for lawyers, accountants, medical doctors, etc. are aimed at
protecting consumers against incompetent practitioners.
➢ Business Strategies Aimed at Deterring Entry
1. Pricing strategies: predatory pricing and limit pricing
2. Single Ownership of an Essential Input;
3. R&D Investment; Will be discussed in due time of the course.
4. Product/Brand Proliferation/Differentiation;
5. Plant Location Strategy;
6. Advertising/ promotion/.
7. Excess Capacity
➢ Note that this determinant of entry barrier is an element of business strategy/conduct/.
➢ So, entry barrier can be considered as determinant of market structure or a business strategy.
➢ Economies of Scale
❖ Two types of interest on costs:
[Link] first is concerning ‘Opportunity Costs’ that arises from their concern for the efficiency of
allocation of resources.
b. Cost of production and scale of operation (economies of scale) as its determinant: Scale
determines costs & costs determine prices, & prices determine market share, and all these
together determine the profitability of the firm.
✓ Horizontal LAC: Indeterminate market structure
• There is no cost advantage (or disadvantage) associated with any scale of operation.
• Market structure is indeterminate; there is no reason for firms to exist.
Cont’d
✓ U-Shaped LAC that Displays Natural Monopoly/High Concentration
✓ U-Shaped LAC that Displays Least Concentration;
• There is no scale advantage in this industry. As a general, many small investors can afford to
join in such an industry. “Small is beautiful”: Plastic, hair dressing/barberry/; jewelry,
✓ Long run Average Cost Curve that Displays Moderate Concentration
• Moderate concentration: E.g. Garmenting, leather products/shoes manufacturing.
❖ In general, different factors determine market structure.
❖ If indeed market structure remains important in the causal relationship between the three I-O
variables, i.e. market structure determines conduct and performance of firms, then we need to
flash out each of the determinants of market structure.