1

2

MARKET STRUCTURE Number of sellers : Many/Several/One Nature of Products: Homogenous/Heterogeneous (Differentiated) Ease of entry and exit: Easy/Restricted/Difficult Availability of market information: Perfect/Imperfect Influence in market price: Price taker / Price searcher 5 Conditions 3

Perfect Competition Perfectly Competitive Market  Is an ideal market structure in the eyes of the economists.  But there is NO real-world example.  In this market, consumers will enjoy the lowest possible price. 4

Features of a Perfectly Competitive Market  Many sellers and buyers  Individual sellers have no influence on the market  Homogeneous goods  Free entry and exit  Perfect information 5

Q1.Many sellers and buyers? Q2.Individual sellers have no influence on the market? Q3.Homogeneous goods? Q4.Free entry and exit? Q5.Perfect information? Yes No Can vegetable stalls be classified as operating in a perfectly competitive market? Can vegetable stalls be classified as operating in a perfectly competitive market? How about Stock Market? 6

Some behaviour of a perfectly competitive firm  Under perfectly competitive market, sellers have to sell at a price according to that established in the market. They are the price taker.  No individual seller engages in non-price competition such as advertising and package design. This is because the goods they sell are the same to the consumers. 7

Monopoly exists when there is only one seller that has no close substitute. 8

Features of a Monopoly  There is no entry in a monopoly and there is only one producer in the market. 9

 The goods or services sold by monopolist may be homogeneous or heterogeneous. 10

11  There is no perfect information in the market. Neither sellers nor consumers are fully aware of the cost, price, quality and quantity of the goods traded. Cost? Price? Quality? Quantity?

Can “Eastern Cross Harbour Tunnel” be classified as operating in a monopoly? Q1.No entry to the market and there is only one producer? No Q2.Services sold are homogeneous or heterogeneous?Yes Q.3No perfect information?Yes How about water supplies in Hong Kong? 12

2 Prominent Behaviour of a Monopolist  A monopolist faces the entire market demand, he can influence either the price or the quantity demanded but not both. If he lowers the price, he will sell more. If he raises the prices, the quantity demanded will ________________. Hence, he needs to search for or set a particular price that maximizes _______________. Thus a monopolist is a price searcher or a price setter. drop profits 13

advertising  Although monopolists do not face direct competition, they still need to compete with sellers selling close substitutes. Non-price competition like _________________ and quality improvement is used. 14

15

No entry to the market & there is only ONE producer Monopoly 16

Group Discussion Draw lines to match the examples of monopolies in Column A with the ways by which their monopolies are formed in Column B. 1.The Mass Transit Railway (MTR)   a. By government franchise 2.The First Bus Co. Ltd.   b. By government ownership 3.The China Light & Power Ltd.   c. By patent, copyright 4.The Peak Tram   d. Limited market demand 5.Hello Kitty   e. Huge capital requirement and economies of scale 6.The Hong Kong International Airport   f. Possession of superior raw materials 7.The Tate’s Cairn Tunnel Co. Ltd.   g. By integration 8.The Water Supplies Department  9.The Organization of Petroleum  Exporting Countries (OPEC) 10. Yun Nan Bai Yao( 雲南白藥 )  17

franchise Common Common franchises in Hong Kong Ways DescriptionExamples The Kowloon Motor Bus Co. Ltd. kmb.com.hk 1. By government franchise The government gives a _____________ to a firm to operate as the only producer of a good. Royalties are paid to the government for having the franchise. The Hong Kong PostOffice 2. Government Ownership The government owns the industry and other sellers are not allowed to enter the industry. 18

market one satisfy 3. By patent and copyright 4. Limited market demand 5. Huge capital requirement and Economies of scale The producer has invented a new product and he has the e__________ right to use new product for a certain period. C_________ give writers, composers and artist e_______ rights over their ideas for certain period. Plasma, Box Fan ? Songs book The Hong Kong Oxygen and Acetylene Co. Ltd. The Hong Kong Electric Holdings Ltd. Limited _________ demand and only _____ supplier in the local market can fully _________ the market demand. The industry requires heavy capital investment. The firm needs to produce a huge output to enjoy the benefits of e___________ of S______. As a result, 1.its average cost of production is lower than the potential competitors. 2.its output may be very high and so it can satisfy the entire market demand. xclusive opyrights xclusive conomies cale 19

superior De Beers (controls the world’s finest diamond mines) 6. Possession of superior raw material 7. By integration Firms in the same industry may combine together until finally only one firm remains. ? The firm possesses __________ raw materials. The Organization of Petroleum Exporting Countries (OPEC) 20

exists when there are several dominant sellers in the marketOligopolyOligopoly is with only a few sellers is with several dominant sellers which take up a relatively large market shares ? ? ?Radio ShellCaltexMobilEsso Petroleum trade e.g. Type of business ? ? ? Travel agencies Cable & Wireless CTI Nets New T&T New World Tel. IDD services HKSB Bank of China Hang Seng Bank Banking industry e.g. Type of business 21

Features of An Oligopoly  A few sellers supply a majority of the total market supply. 22

 Goods sold can be h_____________ or h______________. 23  Oligopolistic sellers are interdependent. They will consider their competitors’ responses in deciding their business policies. omogeneous eterogeneous  Entry into oligopolistic market is usually restricted or difficult.

24 ware ost riceuality uantity  Information is imperfect under oligopoly. Neither sellers nor consumers are fully a_____ of the c____, p____, q______ and q_______ sold by different sellers. Cost? Price? Quality? Quantity?

Can “Mobile Phone Service” be classified as operating in an oligopoly? 25

Q.2 Sellers are interdependent in deciding their business policies? Q.1 A few sellers supply a majority of the total market supply? Q.3 Market information is imperfect? Q.4 Goods sold are homogeneous or heterogeneous? Q.5 Entry is restricted or difficult? How about the petroleum trade? Yes 26

Entry into oligopolistic market is usually restricted & difficult Funeral Parlour Petroleum Filling Station TV Station FixedTelecommunication Services Network Newspaper Travel Agency Fast food shop Supermarket Which barrier(s) discourage(s) the new firms to enter the above markets? 27

28

BEHAVIOUR UNDER OLIGOPOLY  1.Oligopolists can influence the market. They are the price searchers. 29

Pork $19Per Catty 10% discount for the elderly 2.Oligopolists are interdependent. If one seller lowers prices to attract more business, other sellers will follow. A price war will break out, and some sellers may go out of business. 30

$28 Trip to Shenzhen 31

3.Oligopolistic sellers often engage in non- price competition such as free gifts to promote their product. 32

Monopolistic Competition exists when features of both perfect competition and monopoly are present. Features similar to MONOPOLY Features similar to PERFECT COMPETITION 1. There is a large number of sellers and buyers. 2. Entry into the market is relatively easy. 1. Monopolistic competitors sell heterogeneous product 2. Information is imperfect. 33

Can Taxi Service be classified as operating in a monopolistically competitive market? 34

1.Large number of sellers? 2.Easy to enter? (Relatively!) 3.Sell heterogeneous product? 4.Information is imperfect? Yes How about restaurants? 35

Monopolistic Competition BEHAVIOUR I.The monopolistically competitive firms are price searchers. As they sell ____________ products, they can set a slightly higher price without losing their customers. They need to find the particular ___________ that maximises ___________. differentiated priceprofits 36 Monopolistically competitive firms can also charge different prices even for the same product. There are 2 reasons: Boutiques Hair salon

Second, market information about the price is imperfect. It seems impossible for customers to search every shop for the best price. First, services offered with the products may be different, e.g. high-quality service, professional advice. 37

38 II.It is common for monopolistic competitors to engage in non-p_____ c__________, e.g. advertising, offering gifts and organising lucky draws. rice ompetition

III.Firms under monopolistic competition are usually located in the same area in a district. There are 2 reasons : They can be easily known or found out by customers. It helps to reduce their advertising costs. The shops often try to differentiate their products or services, competition may not be so keen. Hong Kong Golden 39

The Major Monopolies in Hong Kong Name of Company The Kowloon Motor Bus Co., Ltd. The Hong Kong Tramways Co., Ltd. The New World First Bus Services Ltd. The City Bus Co., Ltd. The New World First Ferry Services Ltd. Eastern Harbour Crossing Western Harbour Crossing Route 3 (Tai Lam Tunnel Section) Tate’s Cairn Tunnel Government franchise The Kowloon-Canton Railway Corporation Hongkong Post Airport Authority Government ownership The Water Supplies Department Government ownership, ownership of resources Sources of Monopoly Power The China Light and Power Co., Ltd. The Hong Kong Electric Holdings Ltd. The Hong Kong and China Gas Co., Ltd. Mass Transit Railway Corporation Ltd. Huge capital requirement, economies of scale