Chapter 7 Competition and Market Structure Economics Chapter 7 Competition and Market Structure

Market Definition Types Any arrangement which facilitates trade. Product market – transaction of goods and services Factor market – transaction of factors of production, such as labour

Classification

Focus – Product Market A market is any arrangement which enable transactions of a good or service take place. Examples Products Fish market Oil market Jewellery market Property market Services Transportation market Education market Health care market Special example Stock market Product market, in terms of transaction of shares as a final product Factor market, in terms of collection of capita

Transaction Different ways In-person, face-to-face: Documentation Buyers buy products directly from seller E.g. Housewives buy flowers from the flower stalls Documentation Buyers subscribe to a product by mail. E.g. Magazine subscription E-channel Buyers subscribe to a product through the internet, email or phone-call E.g. Film ticket booking & Direct sale

Classification

Competition Forms of competition Definition Under scarcity, both buyers and sellers want to gain more from the market transactions. Buyers bargain for lower prices and more gifts. Sellers compete for more customers and a larger profit. Hence, competition exists in all markets Forms of competition Price competition (Price War) Firms promote sales by cutting prices. Non-price competition Firms use ways other than price reduction to promote sales E.g. better product quality, advertising, gift, after-sale service

Degree of market competition and monopoly power Monopoly power (market power) The influence of a firm has over prices The ability of influencing the market by a firm  Monopoly power  Competition   Monopoly power  Competition  Example A firm with high monopoly power, e.g. HK Electricity Ltd. Increase the price  No loss of customers A firm with low monopoly power, e.g. Chan Kee Store. Increase the price  Customers will no longer buy goods from the store

Classification of market structure Perfect competition or Perfectly competitive market or Price-taking market No monopoly power Buy & sell according to market price Imperfect competition or Imperfectly competitive market or Price-searching market With monopoly power  Price ≠ Loss of customer

General features   Many Many or Few (Comparatively) Few Easy Perfect competition Imperfect competition Monopoly power   No. of buyers Many Many or Few (Comparatively) No. of sellers Few Ease of entry/exit Easy Difficult Nature of products Homogeneous Heterogeneous Availability of market information Perfect Imperfect

Nature of product Homogeneous vs. Heterogeneous Homogeneous products Products which are completely the same. Products are made by mass production. Examples Coca-Cola: The same product being sold in supermarkets / convenient shops / stores. Newspaper: Some product at different news-stand.

Nature of product Homogeneous vs. Heterogeneous Products sold are no the same in terms of Products Other factors Examples Hand made art craft : Unique, can be similar, but not the same. Food: Hamburger in McDonalds & Mos Burger.

From homogeneous to heterogeneous Case 1: Mr. A lives in TKO. SCMP: $6 SCMP sold at TKO news-stand ≠ SCMP sold at Lantau Island Reason: Mr. A prefers to buy a newspaper near his living place. Case 2 Pocari Sweat (ionic drink) Drink sold in Sports Ground ≠Drink sold in the supermarket Reason: Sportsmen need the drink a.s.a.p. after playing sports.

Factors affecting products from being homogeneous Nature of the product Quality (products, sales & after-sale services) Advertising Brand Location of sales outlet Convenience Personal preference

Features of perfect competition Many buyers and sellers Low marker share Free entry and exit No barriers Homogeneous products Products are the same Perfect information Info. About the quality / price / availability Only one price in the market Customers will only pay for the lowest price No non-price competition Perfect info.  No bargaining / non-price competition

In search of perfectly competitive market Theoretically A slightly increase in price, totally loss of customers in perfectly competitive market. In reality Difficult to find perfectly competitive market Reasons Heterogeneous products (Products are always differentiated) Imperfect information

Imperfect competition Classification Monopolistic competition Oligopoly Monopoly

Monopolistic competition Features Many buyers and sellers, low market share Heterogeneous products (*) No entry barriers Examples Fashion retailing Newspaper retailing Medicine retailing (apart from pharmaceutical products)

Monopolistic competition = Price-searching market Production differentiation Consumers have their own choice Individual firms set their own price Average price in the market is a reference

Behaviour under monopolistic competition To make customers feel worthy: Price competition Non-price competition Product quality Better service Gift Advertising Brand establishment After-sale services

Comparison bet. Perfect competition and Monopolistic competition Main features Perfect competition Monopolistic competition Many buyers and sellers  Homogeneous products  Free entry and exit Perfect information N / A Other features Sellers are price takers Non-price competition Bargaining behaviour

Monopoly Features One seller in the market Product is unique & no close substitutes Entry barriers Examples Hong Kong Stock Exchange HKEAA The Airport Authority Hong Kong Water Supplies Department

Monopoly = Price-searching market A monopolist has the entire market The single firm sets its own price ( P=MC, profit maximization )

Competition in Monopoly Market Compete with substitute MTR vs. Bus / Taxi / Ferry Compete with factors of production Labours / Land / Capital Compete with other’s franchises MTR vs. TKO Tunnel Compete for social acceptance Will the gov’t extend the franchise / entry barrier?

Why does Monopoly exist? 1. Restricted by law Gov’t ownership The government is the sole supplier Public enterprises in HK E.g. water supply, CLP in Kowloon & HK Light in HK Island Gov’t franchise (franchised monopoly) A privilege the gov’t grants to a firm Transport utilities in HK E.g. Star Ferry, KMB, MTR Patent and copyright Patent: Exclusive owners/users of their inventions Copyright: Exclusive owners/users of their works (authors & artists)

Why does Monopoly exist? 2. Natural monopoly Hugh entry cost Extremely high fixed cost at the beginning Economies of scale Expansion of firm  Lower AC The firm can then lower the price Other firms have comparative high cost can’t survive Become natural monopoly E.g. Water supply and electricity supply

Why does Monopoly exist? 3. Exclusive ownership of essential resources for production Resources are rare and owned by one firm E.g. De Beer owns the world major diamond mines The reservoirs are owned by HK Government Extraction of petroleum by China National Petroleum Corporation (中國石油天然氣集團公司)

Monopoly – Pros and Cons Price controlled by single firm Less choices No competition  No improvement Approval of franchises leads to corruption  Higher cost of supervision Pros Economies of scale firm: lower AC customers: lower price Reduce duplication of facilities and avoid wastage Easier regulations Royalties

Oligopoly Features The market is dominated by a few big firms Entry barriers Mutual influence of behaviour Marketing strategy Pricing Output Promotion Competition and cooperation between oligopoly Association among firms (known as cartels) Cooperate to raise profits by agreed prices or restrictions

Oligopoly Examples Gasoline supply: Caltex / CRC / Esso / Shell / Sinopec Telecommunication: 3HK / One2free / PCCW / Smartone TV Broadcast: TVB / ATV / Cable TV / Now TV Banking industry: HSBC / BOC / Heng Sang / Standard Chartered

Summary Price-taking market (Perfect competition) Price-searching market (Imperfect competition) Monopolistic competition Monopoly Oligopoly Main features No. of buyers and sellers Product nature Entry and exit Market info. Other features Non-price competition Market power Examples A few major sellers Many Many One Seller Homogeneous/Heterogeneous Homogeneous Heterogeneous Unique Easy Easy Difficult Difficult Perfect Imperfect None Yes Yes Yes None Little Greatest Great Foreign Exchange (Theoretically) News stands, restaurants MTR, bus services, water supplies Banks, gasoline stations