Embed Size (px)
Citation preview
Economics
Chapter 7
Competition and Market Structure
Market
Definition Any arrangement which facilitates trade.
Types Product market – transaction of goods and services Factor market – transaction of factors of production,
such as labour
Classification
Market
Product Market(Goods and services)
Factor Market(Factors of production)
Focus – Product Market A market is any arrangement which enable transactions of a good or ser
vice 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:
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
Market Structure
Perfect Competition(Perfectly competitive market)
Imperfect Competition(Imperfectly competitive market)
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 competitionor Perfectly competitive market or Price-taking market No monopoly power Buy & sell according to market price
Imperfect competitionor Imperfectly competitive marketor Price-searching market With monopoly power Price ≠ Loss of customer
General features
Perfect competition
Imperfect competition
Monopoly power
No. of buyers Many Many or Few (Comparatively)
No. of sellers Many Few
Ease of entry/exit Easy Difficult
Nature of products Homogeneous Heterogeneous
Availability of market information
Perfect Imperfect
Nature of productHomogeneous 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 productHomogeneous vs. Heterogeneous
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
TheoreticallyA slightly increase in price, totally loss of customers in perfectly competitive market.
In realityDifficult 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 undermonopolistic 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 Corpor
ation (中國石油天然氣集團公司 )
Monopoly – Pros and Cons
Pros Economies of scale
firm: lower AC customers: lower price
Reduce duplication of facilities and avoid wastage
Easier regulations Royalties
Cons Price controlled by single
firm Less choices No competition
No improvement Approval of franchises leads
to corruption Higher cost of supervision
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
SummaryPrice-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
Many Many One Seller A few major sellers
Homogeneous Heterogeneous Unique Homogeneous/Heterogeneous
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
