1. PART 3 MARKET STRUCTURES Chapter 5 Market structures and the Australian capitalist economy
Oligopoly
Monopoly
Monopolistic
Perfect competition

2. Lecture Plan Types of market structures: Perfect competition Monopoly
Monopolistic competition
Oligopoly

3. Market Structures
In capitalist economic systems, decision making (concerning production and distribution) occurs through the market
A market is the interaction of:
Supply (sellers willing to exchange goods for payment at a profit) and
Demand (consumers who exchange money for goods to increase utility)
(cont.)

4. Market Structures (cont.)
Markets may be classified into different structures according to the degree of competition that exists
This is determined mainly by the number, size and behaviour of firms
Degree of competition
Perfect Monopolistic Oligopoly Monopoly
competition competition

5. Perfect Competition (cont.)
Mainly a theoretical model, close examples: fruit and vegetable markets, stock exchange
Characteristics are:
Many buyers and sellers (each relatively small)
Homogeneous product (identical)
Perfect knowledge
Perfect mobility of firm and resources they employ
No barriers to (freedom of) entry or exit of the market
Absence of non-price competition
Firms are ‘price takers’—individual firms have no influence over market price, as they each produce such a small fraction of the total supply
(cont.)

6. Perfect Competition (cont.)
Market Individual firm
(price taker) P P Ep Ep D Eq Q Q

7. Monopoly Imperfect competition
One seller (opposite extreme to perfect competition)
One product (with no close substitutes)
Consumers are forced ‘to take it or leave it’
(cont.)

8. Monopoly (cont.)
Firm is a ‘price maker’ as it controls the total quantity supplied P D Q
(cont.)

9. Monopoly (cont.)
Barriers to entry (which reduce the ability of new firms to enter the market and compete)
They may be due to:
Massive financial (establishment) costs
Little or no access to raw materials
Existing firms being protected by legislation
Existing firms owning exclusive rights
The size of the market (e.g. markets are not big enough to support more than one firm)
Minimal advertising expenditure
(cont.)

10. Monopoly (cont.) Examples in Australia
Sugar refining (CSR)
Postal services (Australia Post)
Previously, federal or state governments had monopolies in areas such as:
Telecommunications (Telecom/Telstra)
Gas
Electricity
Water supply
Public transport

11. Monopolistic Competition
A large number of firms producing close, but not identical substitutes P D Q
(cont.)

12. Monopolistic Competition (cont.)
Firms use PRODUCT DIFFERENTIATION to distinguish themselves from other competitors e.g. physical differences in the product, differences in location, packaging etc.
I.e. heterogeneous products (differentiated)
Relatively large numbers of sellers creates competition, while product differentiation causes a degree of monopoly power
(cont.)

13. Monopolistic Competition (cont.)
Limited price control (is dependent on the degree of product differentiation as each firm produces a fairly small share of the total output)
Non-price competition e.g. product quality
Relatively small barriers to entry e.g. securing a share of the market through advertising may be necessary
(cont.)

14. Monopolistic Competition (cont.)
Imperfect mobility of resources
Imperfect knowledge
Examples in Australia:
Clothing and footwear industries
Furniture industry
Cafes, restaurants

15. Oligopoly A few sellers (3 to 6) dominate the market
Products are close substitutes e.g. branded petrol
A degree of control over price:
Firms are ‘price makers’—as each supplies a large portion of the total industry output
No frequent or significant price changes as it can lead to price wars
(cont.)

16. Oligopoly (cont.)
Potential for collusion—where all firms either increase or decrease their prices as a group
These agreements allow the firms to exert control over the price like a monopolist
Note: A type of collusion involving a formal agreement about price and production is the cartel e.g. OPEC
(cont.)

17. Oligopoly (cont.) Significant non-price competition
Via product differentiation, advertising, restrictive trade practices
Difficult market entry
Need for substantial financial backing
Ownership of raw materials or patents
Economies of scale for the existing firms
(cont.)

18. Oligopoly (cont.) Examples in Australia: Banking Brewing Cigarettes
Car industries
Mobile phones (e.g. Telstra, Optus, Vodafone, Virgin Mobile, Orange)

19. Summary Type of market Product details Features Perfect Competition
Homogenous
Perfect substitutes
Many firms
Price takers
Freedom of entry
Monopolistic
Product differentiation
Many firms,
advertising to establish brand preference
ease of entry
Oligopoly
Close substitutes
3–6 firms
Some price control
Monopoly
Single product, no substitutes
Single producer
Complete control over price