1. Market Structures Ms. M. Ward Economics
We are going to be learning about Market Structures this week. You will need to create a word processing document with the questions and answers on this Power Point.

2. Type of market structure influences how a firm behaves:
Pricing
Supply
Barriers to Entry
Efficiency
Competition
What is an example of a Barrier to Entry?
Which of the following companies is more difficult to start up-
Car Manufacturer
Restaurant
Why?
Market Structures

3. Market Structures Degree of competition in the industry
High levels of competition – Perfect competition
Limited competition – Monopoly
Degrees of competition in between
Give an example of a company where there is a high level of competition.
Give an example of a company where the competition is in between.
Market Structures

4. Market Structure Determinants of market structure
Freedom of entry and exit
Nature of the product – homogenous (identical), differentiated?
Control over supply/output
Control over price
Barriers to entry
Is Agriculture a market where the product is identical or differentiated?
Does a farmer control the price of wheat?
Market Structure

5. Perfect Competition: Market Structure Free entry and exit to industry
Homogenous product – identical so no consumer preference
Large number of buyers and sellers – no individual seller can influence price
Sellers are price takers – have to accept the market price
Perfect information available to buyers and sellers
At a farmers market is there a large number of buyers and sellers?
Can a car manufacturer enter the market quickly?
Market Structure

6. Examples of perfect competition:
Financial markets – stock exchange, currency markets, bond markets?
Agriculture?
To what extent?
Go to the web site and find the price of PowerShares DB Agriculture (DBA)
How much did the price change today?
Market Structure

7. Market Structure 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
Do you think there are enough choices of cell phone providers?
Why or why not?
Market Structure

8. Market Structure 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!
Think about the Apple iphone. Do you think Apple made an abnormal profit in the first 6 months after the introduction of that product? Do you know anyone who has an iphone?
Market Structure

9. Market Structure Imperfect or Monopolistic Competition
Many buyers and sellers
Products differentiated
Relatively free entry and exit
Each firm may have a tiny ‘monopoly’ because of the differentiation of their product
Firm has some control over price
Examples – restaurants, professions – solicitors, etc., building firms – plasterers, plumbers, etc.
Do you think there is more competition in Mexican restaurants or Thai restaurants in Chicago.
Why?
Market Structure

10. Market Structure Oligopoly – Competition amongst the few
Industry dominated by small number of large firms
Many firms may make up the industry
High barriers to entry
Products could be highly differentiated – branding or homogenous
Non–price competition
Price stability within the market - kinked demand curve?
Potential for collusion?
Abnormal profits
High degree of interdependence between firms
The Auto industry is an oligopoly. What do you think it would cost to enter the Auto industry? If Toyota and Ford worked together do you think it would raise or lower prices?
Market Structure

11. Market Structure Examples of oligopolistic structures: Supermarkets
Banking industry
Chemicals
Oil
Medicinal drugs
Broadcasting
Go to and find 2 more examples of oligopolistic structures.
Market Structure

12. Measuring Oligopoly: Market Structure
Concentration ratio – the proportion of market share accounted for by top X number of firms:
E.g. 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
Fill in the blanks:
The largest oil companies account for ___ percent of the market.
The largest pharmaceutical companies account of ___ percent of the market.
Find the answer on the internet.
Market Structure

13. Duopoly: Market Structure Industry dominated by two large firms
Possibility of price leader emerging – rival will follow price leaders pricing decisions
High barriers to entry
Abnormal profits likely
Find two examples of a Duopoly on the Internet
Market Structure

14. Market Structure Monopoly: Pure monopoly – industry is the firm!
Actual monopoly – where firm has >25% market share
Natural Monopoly – high fixed costs – gas, electricity, water, telecommunications, rail
Give an example of a pure monopoly
Give an example of an actual monopoly
Market Structure

15. Monopoly: Market Structure High barriers to entry
Firm controls price OR output/supply
Abnormal profits in long run
Possibility of price discrimination
Consumer choice limited
Prices in excess of MC
Define monopoly
Define price discrimination
Market Structure

16. Market Structure 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
What is R&D?
What is an economy of scale?
Market Structure

17. Market Structure Disadvantages:
Exploitation of consumer – higher prices
Potential for supply to be limited - less choice
Potential for inefficiency –
X-inefficiency – complacency over controls on costs
Is a public school a monopoly? Why or why not?
Market Structure