Transcript ###Market Structure 2 - PowerPoint Presentation

Market
Structure
Market Structure
 Market structure – identifies how a market is made up in terms of:
 The number of firms in the industry
 The nature of the product produced
 The degree of monopoly power each firm has
 The degree to which the firm can influence price
 Profit levels
 Firms’ behaviour – pricing strategies, non-price competition, output levels
 The extent of barriers to entry
 The impact on efficiency
Types of Market Structure
 Perfect Competition
 Monopoly
 Monopolistic Competition
 Oligopoly
Market Structure
Perfect
Competition
Pure
Monopoly
Greater degree of monopoly power
More competitive
Perfect
Competition
Features
 Large number of buyers and sellers
 Homogeneous products
 Perfect mobility of factors of production
 Free entry & free exit of firms
 Perfect knowledge
 Absence of collusion or artificial restaraint
 No govt. intervention
Price Determination
under
Perfect Competition
Price determination under perfect
competition is analyzed under three
different time periods:
 Market period or very short run
 Short run
 Long run
Pricing in “Market Period”
 Demand determined Price
 Supply determined Price
Pricing in the “Short Run”
 industry
 Firm
Pricing in the “Long Run”
 Industry
 Firm
Monopoly
 Only one seller of a particular product
Characteristics of Monopoly
 Single Producer
 No close substitute
 Inelastic demand curve
 Price Maker
 Barriers to entry
 Legal restrictions or barriers to entry of other firms
 Control over key raw material
 Examples: Public utilities – telephones and electricity
etc.
Pricing & Output Decision: Monopoly
Costs / Revenue
MC
7.00
AC
Monopoly
Profit
Given
barriers
entry,
AR (D)the
curve
for ato
monopolist
the
monopolist
will beprice
able to
likely
to be relatively
exploit
abnormal profits in the
inelastic.
long run as entry to the
market is restricted.
3.00
MR
Q1
AR
Output / Sales
Price Discrimination
It refers to discrimination of price for different
consumers on the basis of their income or purchasing
power, geographical location, age, sex, colour, marital
status, quantity purchased, time of purchase etc. for eg:• Physicians and hospitals
• Merchandise sellers
• Railways and Airlines
• Cinema shows or musical concerts
• Domestic and foreign markets
Necessary conditions
• Different Markets must be separable for a seller
• The Elasticity of demand must be different in different
markets
• There must be imperfect competition in the market
• Profit maximizing output should be larger than the
quantity demanded in a single market or section of
consumers
First Degree of Price Discrimination
Costs / Revenue
S
P
0
Q
D
Output / Sales
Second Degree of Price Discrimination
Costs / Revenue
S
P1
P2
P3
P
0
Q1
Q2
Q3
Q
D
Output / Sales
Third Degree of Price Discrimination
Costs / Revenue
Market B
Market A
Total Market
MC
PB
PA
AR=D
ARA
MRB
MRA
0
QA
Output / Sales
0
ARB
QB
Output / Sales
MR
0
Q
Output / Sales
Monopolistic
Competition
Features:
 Large no. of sellers
 Free entry & free exit
 Perfect factor mobility
 Complete dissemination of market information
 Differentiated product
Monopolistic vs. Perfect
Competition
 Differentiated & Homogeneous products
 Decision making
Price & output decisions in “Short Run”
Price & output decisions in “Long Run”
Non Price Competition: Selling Cost
 Two common forms of non price competition are
 Product Innovation
 Advertisement
Oligopoly
Ipod
Zune
Oligopoly
Few producers control supply and price
Characteristics of Oligopoly
 Small number of sellers
 Homogenous or differentiated products
 Interdependence of decision making
 Barriers to entry
 Indeterminate price and output
 Examples : Aluminum, steel, cigarettes, cars etc
Sweezy’s Kinked
Demand Curve
d1 is relatively elastic
d2 is relatively inelastic
The kinked demand curve indicates
the possibility of price rigidity
Changes in cost do not
impact output and prices as
long as MC remains in the
vertical portion of MR
Price Leadership Models

Sometimes, a Leading role is played by the dominant firm
due to its size, efficiency, economies of scale or firm’s ability
to forecast market conditions accurately. It initiates a change
in price and other small firms follow.

The dominant firm may also serve as a means to price
discipline and price stabilization which is knows as “Effective
Price leadership”
Price Leadership by Low Cost Firm
Costs / Revenue
MC’
P3
AC’
P2
MC
AC
E’
P1
E
AR
MR
0
Q1
Q2
Output / Sales
Price Leadership by Dominant Firm
Cost/Revenue
D
S
E
Cost/Revenue
MCD
P3
P3
A
P’
P2
C
B
P’
F
P
P2
P1
P1
DM
0
Output/Sales
DD
0
QD
MRD
Output/Sales
Barometric Price Leadership
The barometric Firm may not necessarily be the largest firm
but it is supposed to have a better knowledge of the
prevailing market conditions.
Advantages:
 Better Price
 Dependence
 Reaction to Economics warfare
Collusion Model : The Cartel
A cartel is an association of business firms formed by an
explicit agreement between them. They jointly establish a
cartel organization to:
 Make Price and output decisions
 Establish Production Quotas.
 Supervise market activities of the firms.
Market Allocation under Cartel
Costs / Revenue
Firm B
Firm A
Industry
ac1
MC
mc1
ac2
mc2
P
C
AR=D
MR
0
q1
Output / Sales
0
q2
Output / Sales
0
Q
Output / Sales
Thank You!