1 11.Market Structure

2 Chapter 11 : main menu 11.1Market and competition Progress Checkpoint Features of different market structures Theory in Life 11.1 Progress Checkpoint Sources of monopoly power Concept Explorer 11.1

3 Progress Checkpoint 1 Which of the following statements is correct? Can both be correct? If a buyer and a seller transact their weapons in an online game over internet, a market exists. Statement B : If a buyer and a seller transact a computer in a place, a market exists. Statement A :

4 Progress Checkpoint 1 Which of the following statements is correct? Can both be correct? Both statements are correct. A market exists whenever commodities are exchanged between buyers and sellers. It does not necessarily need to have a physical location.

5 Theory in Life 11.1 In late 1995 to early 1996 and 1999, local newspapers competed among themselves by ‘ predatory price cutting ’, i.e. they tried to eliminate competitors by selling their newspapers below cost. It was observed that when one newspaper reduced its price, others would immediately follow. What is the structure of newspaper market in Hong Kong?

6 Theory in Life 11.1 The newspaper market in Hong Kong can be regarded as oligopolistic. This is because the following features are found : –A few dominant sellers Even though many newspapers are published in Hong Kong, the three newspapers mentioned above occupy a significant market share. Their pricing behaviour can influence other newspapers. –Heterogeneous goods In the viewpoint of consumers, the newspapers produced by different publishers are different.

7 Theory in Life 11.1 The newspaper market in Hong Kong can be regarded as oligopolistic. This is because the following features are found : –Interdependence in price setting As the pricing behaviour of one newspaper is immediately followed by other newspapers, there is inter- dependence in price setting. –Some entry barriers As there are already many well-established newspapers in the market, it is quite difficult for new publisher to enter the newspaper market.

8 Progress Checkpoint 2 Q.There are many supermarkets of various scales operating in Hong Kong. Explain, with TWO reasons for EACH market structure, why the market of supermarket business belongs to (a)monopolistic competition, and (b)oligopoly

9 Progress Checkpoint 2 Reasons for the market belonging to monopolistic competition are –there are a large number of buyers and sellers, –some good and services provided by different supermarkets are heterogeneous. Reasons for the market belonging to oligopoly are : –there are a few dominant sellers, –sometimes there is interdependence in price setting.

10 Concept Explorer 11.1 Does a monopolist, as the only seller in a market, face any competition? A monopolist faces competition in the following three aspects : –competition for consumers ’ expenditurecompetition for consumers ’ expenditure –competition for factors of productioncompetition for factors of production –competition for monopoly rightcompetition for monopoly right

11 Concept Explorer 11.1 –Competition for consumers ’ expenditure A monopolist competes with sellers of distinct substitutes. For example, the Kowloon- Canton Railway Corporation (KCRC), as the only supplier of train service in Hong Kong, faces competition from bus, mini-bus or taxi for consumers ’ expenditure.

12 Concept Explorer 11.1 –Competition for factors of production A monopolist, as an employer of labour, competes with other firms in factor market for production factors. For example, the KCRC competes with other transport companies in employing engineers, drivers, technicians, etc.

13 Concept Explorer 11.1 –Competition for monopoly right The government may grant a licence to a firm to be the sole supplier of a service. The potential suppliers of such service need to compete among themselves to win the licence. For example, in 1993, many firms applied for the licence to provide subscription TV programmes in Hong Kong, and the Hong Kong Cable Television Ltd. has finally won.

14 End of Chapter 11