Chapter 8 An overview of market structures Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Learning objectives Define and describe the four basic models of alternative market structures, their assumptions, distinguishing features and operation Explain, briefly, how each of these market structures relates to the demand side of the market Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Learning objectives (cont.) List the determinants of market structure in our economy Review other important elements of competition, and how they may lead to differences in the contestability of different types of markets Provide a brief overview of the remainder of our study of microeconomics Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Market analysis Market behaviour depends on the degree of competition on both the demand and supply sides On the supply side a market could have anything between one and very many suppliers Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Four basic market models There are four market models with varying degrees of competition in supply: Pure competition Pure monopoly Monopolistic competition Oligopoly Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Pure competition Distinguishing characteristics: Very large number of sellers Standardised (homogeneous) product ‘Price taker’ No individual firm can influence market price Free entry (and exit) Absence of non-price competition Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Pure competition (cont.) Examples: Precise examples of pure competition are rare Agricultural commodities fit quite well with competitive model Various agricultural crops Fruits Livestock Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Pure monopoly Distinguishing characteristics: Single seller No close substitutes ‘Price maker’ The monopolist’s price is the market price Blocked entry Barriers to entry are any obstacles that prevent the entry of new firms into an industry Goodwill advertising Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Pure monopoly (cont.) Examples: Public utilities such as electricity and water Steel — BHP Billiton Sugar — CSR Limited Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Monopolistic competition Distinguishing characteristics: Relatively large numbers Product differentiation Any tangible or intangible feature that sets it apart from other similar products Limited price control Product loyalty or preference will enable some minor price control Relatively easy entry Non-price competition Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Monopolistic competition (cont.) Examples: Retail trade Some clothing items e.g. dresses Petrol stations Restaurants Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Oligopoly Distinguishing characteristics: Fewness Standardised or differentiated products Pricing interdependence May lead to degrees of collusion Difficult entry Advertising and quality competition Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Oligopoly (cont.) Examples Aluminium ingots (standardised) Bank services Beer (differentiated) Information media Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Characteristics of the four basic market models Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Market structure and the buyer’s side of the market Perfect/pure competition Many buyers Monopsonistic competition Fairly large number of buyers Oligopsony Few buyers of the product Monopsony Only one buyer of the product Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Market structure based on number of buyers Bilateral monopoly A single seller and one buyer Imperfect competition All market structures that deviate from pure/perfect competitive model Market characteristics are equally applicable to resource markets Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Determinants of market structure Legislation and government policies Some promote competition and some monopoly The policies and practices of business firms Mergers, consolidations, and foreign multinationals — monopoly/oligopoly Technological considerations Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Other competitive dimensions Geographical factors Location can influence degree of competition Inter-industry competition Aluminium could face competition from other products Technological advances New products and technology can change competitiveness over time Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Contestable markets Markets where entry to and exit from the industry can be accomplished at low or very low cost Market contestability limits the ability of monopolists to use pricing powers to achieve economic profits Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

International trade International trade has a major impact on market power International trade, which by providing an alternative source of supply, may substitute for domestic consumption Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia

Next chapter: The costs of production Copyright  2007 McGraw-Hill Australia Pty Ltd PPTs t/a Microeconomics 8e, by Jackson & McIver By Muni Perumal, University of Canberra, Australia