1. COMPETITION & MARKETS

2. MARKET STRUCTURES Type of market structure influences how a firm behaves: Pricing Supply Barriers to Entry Efficiency Competition

3. MARKET STRUCTURES Determinants of market structure Freedom of entry and exit Nature of the product – identical or differentiated? Number of sellers in a market

4. I. PERFECT COMPETITION 1. Large number of buyers and sellers – no individual seller can influence price 2. Homogenous product – identical so no consumer preference 3. Perfect information available to buyers and sellers 4. Easy entry and exit to industry 5. Sellers are price takers – they have to accept the market price

5. I. PERFECT COMPETITION Examples of perfect competition: Financial markets – stock exchange, currency markets, bond markets? Agriculture? To what extent?

6. I. PERFECT COMPETITION Advantages of Perfect Competition: High degree of competition helps allocate resources to most efficient use Price = marginal costs Normal profit made in the long run Firms operate at maximum efficiency Consumers benefit

7. I. PERFECT COMPETITION What happens in a competitive environment? New idea? – firm makes short term abnormal profit Other firms enter the industry to take advantage of abnormal profit Supply increases – price falls Long run – normal profit made Choice for consumer Price sufficient for normal profit to be made but no more!

8. II. MONOPOLISTIC COMPETITION 1. Many buyers and sellers 2. Products slightly differentiated 3. Easy entry and exit 4. Sellers are price searchers – they can sell some of their product at various prices Examples – restaurants, professions – solicitors, etc., building firms – plasterers, plumbers, etc.

9. III. MONOPOLY Pure monopoly – industry is the firm! Actual monopoly – where firm has >25% market share Natural Monopoly – high fixed costs & low average total costs – gas, electricity, water, telecommunications, rail

10. III. MONOPOLY 1. Market consists of one seller 2. No close substitutes 3. High barriers to entry – it is difficult to enter the market 4. Price searchers

11. BARRIERS TO ENTRY Legal barriers Public Franchise – a single firm is given the right to a market by government – also known as government monopolies Patents – an inventor of a product or process is protected from competition for 20 years Copyrights – authors or originators of literary or artistic productions have sole rights to their creations for a period of time

12. Barriers to Entry Extremely low Average Total Costs – Natural Monopolies – also known as market monopolies Exclusive ownership of a scarce resource

13. III. MONOPOLY Advantages and disadvantages of monopoly: Advantages: May be appropriate if natural monopoly Encourages R&D Encourages innovation Development of some products not likely without some guarantee of monopoly in production Economies of scale can be gained – consumer may benefit

14. III. MONOPOLY Disadvantages: Exploitation of consumer – higher prices Potential for supply to be limited - less choice Potential for inefficiency Antitrust laws – laws to control monopoly power and promote competition

15. IV. OLIGOPOLY Competition amongst the few 1. Industry dominated by small number of large firms 2. Products are identical or only slightly differentiated - branding 3. High barriers to entry 4. Price searchers 5. Firms are interdependent Potential for collusion? Cartel agreements – firms coordinate to reduce competition among themselves

16. IV. OLIGOPOLY Examples of oligopolistic structures: Supermarkets Banking industry Chemicals Oil Medicinal drugs Broadcasting

17. IV. OLIGOPOLY Measuring Oligopoly: Concentration ratio – the proportion of market share accounted for by top X number of firms: 5 firm concentration ratio of 80% - means top 5 five firms account for 80% of market share 3 firm CR of 72% - top 3 firms account for 72% of market share

18. PRICE DISCRIMINATION When a seller charges different prices to different buyers without a cost difference to do so What allows price discrimination? Customers must be willing to pay different prices Seller must be able differentiate between customers The good can’t be resold to others

19. PRICE DISCRIMINATION Examples Restaurants, movie theaters, pharmacy, Uber Why not just raise prices for everyone? Seller believes that some customers are willing to pay more than others Isn’t it illegal?! Only under certain conditions Sellers cannot discriminate to reduce competition Sellers cannot discriminate across state lines Price discrimination is not usually illegal if seller can show that it is necessary for market competition