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8/3/2019 Maket Structure
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MARKET STRUCTURE
GROUP 1
1.Nguyn L Hong V2.Phm nh Thi3.V Cng Thu4.Nguyn Phc Hng5.V Hong Long
5.1 DEFINING THE MARKET& THE INDUSTRY:
5. MARK ET STRUCTURE
MARKET
A market is a nexus interaction between buyers
and sellers
MARKET
Example : Street market , Stock market , Stock
market .
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MARKETINDUSTRY
An industry is a firm or group of firms
DISTINGUISHING DISTINGUISHING
The geographical extend of the market:
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DISTINGUISHING
Summarize :
Marker : Who are you selling to ?
Industry :What are you selling ?
5.2 WHAT IS MARKET STRUCTURE
?
Market structure refer to the nature, level and extent of
competition in an industry or market. This structure is theresult of actions and interactions of individuals and
institutions including firms, business organizations
It refers to factors such as: the number of firms that
compete, their concentration, cost, demand and
technological conditions, and ease of entry and exit
condition.
The traditional model of market
structureThere are 3 main elements:
The degree of seller (and buyer) concentration.
The degree of product differentiation within individual
market.
The condition entry and exit.
Measure and definition ofconcentration
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The n firm concentration : refers to the cumulated market share of n leading firms in the industry, n is
between 4 and 8. is computed as:
=
CRn 0: the industry is composed a very large
number of firms, and the less concentrated is the
industry.
CRn 1 four or fewer firms produce all of an
industrys output, the more concentrated is the
industry and there is very little competition in
the industry.
is popular because its limited data
requirements (size of market and market share
of largest firms). But it doesnt inform the
relative importance of firms within a particular
industry.
The Herfindarlh index : H.
The Gini coefficient : GC.The Gini coefficient is a statistical measure base upon the Lorenz curve.
= +
The entropy index : E.
The entropy index measure the degree of uncertainty associate with a particular
market structure.
= .1
When all market shares are equal, = :
= .1 .log = log
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Theoretical Market Number 1 Theoretical Market Number 2
Number ofCompanies
Market Number ofCompanies
Market
Share E ntropy Herfindahl Share Entropy Herfindahl
1 10.0% 0.2303 0.01 1 50.0% 0.346574 0.25
2 10.0% 0.2303 0.01 2 5.6% 0.160576 0.00
3 10.0% 0.2303 0.01 3 5.6% 0.160576 0.00
4 10.0% 0.2303 0.01 4 5.6% 0.160576 0.00
5 10.0% 0.2303 0.01 5 5.6% 0.160576 0.00
6 10.0% 0.2303 0.01 6 5.6% 0.160576 0.00
7 10.0% 0.2303 0.01 7 5.6% 0.160576 0.00
8 10.0% 0.2303 0.01 8 5.6% 0.160576 0.00
9 10.0% 0.2303 0.01 9 5.6% 0.160576 0.00
10 10.0% 0.2303 0.01 10 5.6% 0.160576 0.00
Theil's Entropy: 2.3026 Theil's Entropy: 1.791759
Herfindahl (*10,000): 1,000 Herfindahl (*10,000): 2,778
The Lerner index: L.
The Lerner index is i n fact a measure of monopoly power.
=
5.3/ Market structures:
In economics , market structure(also known as thenumber of firms producing identical products).
Perfect competitionMonopolistic competitionOligopoly DuopolyMonopoly.
a. Perfect competition is a t heoretical market
structure that features unlimited contestability (or
no barriers to entry ), an unlimited number of
producers and consumers, and a perfectly
elastic demand curve .
Characteristics:
Infinite buyers and sellers
Zero entry and exit barriers
Perfect information Homogeneous products
Perfect factor mobility
Zero transaction costs
Profit maximization
Non-increasing returns to scale
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* Infinite buyers and sellers Infinite consumers with
the willingness and ability to buy the product at a
certain price, and infinite producers with the
willingness and ability to supply the product at a
certain price.
* Zero entry and exit barriers It is relatively easy for a
business to enter or exit in a perfectly competitive
market.
* Perfect information - Prices and quality of
products are assumed to be known to all
consumers and producers
Homogeneous products The characteristics ofany given market good or service do not varyacross suppliers.
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Perfect factor mobility - In the long run factors ofproduction are perfectly mobile allowing free longterm adjustments to changing market conditions.
Zero transaction costs - Buyers and sellers incur nocosts in making an exchange (perfect mobility).
Profit maximization - Firms aim to sell where marginal
costs meet marginal revenue, where they generate themost profit.
Non-increasing returns to scale - Non-increasing returns to scale ensure that there aresufficient firms in the industry
EX:
Financial markets stock exchange, currency markets,bond markets?
Agriculture?
Results:
TR=P*Q
MR=MC=P
b. Monopolistic competition : also called competitive
market, where there are a large number of firms, each
having a small proportion of the market share and
slightly differentiated products.
Characteristics:
Product differentiation:
new designs
advertising
Branding
Many firms
Free entry and exit in the longrun
Independent decision making
Market Power
Buyers and Sellers haveperfect information.
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EX: Restaurant, professions-solicitors, etc,building firms-
planterers, plumbers..
RESULTS:
c. Monopoly , where there is only one provider of a
product or service
Characteristics:
Profit Maximiser: Maximizes profit.
Price Maker: Decides the price of the good or product to be
sold. High Barriers to Entry: Other sellers are unable to enter the
market of the monopoly.
Single seller: In a monopoly there is one seller of the good which produces
all the output.Therefore, the whole market is being served by a single
company, and for practical pur poses, the company is the same as the
industry.
Price Discrimination: A monopolist can change the price and q uality of the
product. He sells more quantities charging less pr ice for the product in a
very elastic market and sells less quantities charging high price in a less
elastic market.
Imperfect Information of the Market: Sellers & Buyers dont have perfect
info. on price & quality of goods
No Close Substitutes :Buyers are difficult to findanother goods to satisfy the same want.
EX: high fixed costs gas, electricity, water,telecommunications, rail....
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Results:
6. STRUCTURE ANDSTRATEGY: OLIGOPOLY
OLIGOPOLY
In oligopoly
Firms operate in ways influenced by
their expectations of the reactions of
other firms
Price Output
OLIGOPOLY
Do not refer explicitly to numbers of firms,
product differentiation or barriers of entry
Become main focus of modern industrial
economics
Base on behavioural and strategic factors (more
than structural ones)
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OLIGOPOLY
Only the firm in oligopoly is capable of developing
proper trategy (within the confines of theory)
OLIGOPOLY
In perfect competition
All the firms have the plans to maximize
their profits
OLIGOPOLY
In monopolistic competition
Taking a decision is
limited whether and
how to differentiate
their products
OLIGOPOLYIn monopoly
Has only one decision: how to set either
price or quantity in such a way as to
maximize profits by getting MR equal to
MC
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OLIGOPOLY
So, what is the definition of strategy?
Not only the decision what price to
charge.But also the
decision as to
whether to compete
on the basis of price
at all
6.1.COURNOTS DUOPOLY
COURNOTS DUOPOLY
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COURNOTS DUOPOLY
Not co-operation : = = 10, = 10
= = 100
Co-operation : = 15, = 15
= = 2 = 112,5
6.2.BERTRANDS MODEL
6.3. Product differentiationThe basis for differentiation stratergics is a
degree of differentiation between the products of
firm 1 and 2
If there is complete differentiation , each of the
firms becomes a monopolist, the price will be stillhigher.
It has been te subject of attention both in
theoretical mode-building and in empirical test of
product differenttiation.
/ /
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Theoretical model-building
Cellini in 2004 on product differentiation
Hoenig in 2003 on horizontal differentiation and
strategic complementarity
Belleflamme and Toulemonder in 2003 on product
differentiation in vertical oligopolies
Empirical test of product differentiation
Goldberg and Verboven in 2001: Examine theEuropean car industry.
6.4. Differentiated reactions
A kink (point A) is a
equilibrium point which
the oligopolist considers
the possible responses to
an increase or decrease in
price.
The idea of differentiated
reactions can also be
applied to different firms
in a particular industry
responding to the same
event.
6.5. Stackelberg leadership
Heinrich von Stackelberg is a German economist
In 1934, he brought some refinement to oligopoli theory
In the Stackelberg duopoly moel, it is assumed that Firm 2
follows the Cournot behavioural assumption. It observes Firm1s output and tries to determine a profit-maximizing level of
output.
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The market demand curve assumes: p = f(Q) = a-bQ
Where Q = q1 + q2, firm 2s reaction function is thus:
q2 = (a c2)/2b 0.5 q1
The dominant firms profit is: 1 = pq1 cq1
Firm 1 will maximize profit where: d/dq1 = 0
If c1=c2=c : q1= (a c) /2b and q2 = (a c) / 4b
Therefore, we have: p = (a + 3c)/4
6.6. COLLUSIVE DUOPOLY
Collosive : Two or more firms agree on the
price , the quantities to be produced , andthe spatial division of the market .
6.7. COLLUSIVE DUOPOLY
Example :
6.8. CONJECTURAL VARIATIONS
Conjectural variation (CV) : A proposed
approach to the problem of how
equilibrium is reached under oligopoly
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THANKS FOR YOUR ATTENTION!