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Market Structure By Group #1: Silvia Luque Kyoungoung Min Jasung Park Charlie Li Qian Samantha Rodriguez Slide 2 Five Types of Market Structure Perfect Competition Monopolistic Competition OligopolyOligopsonyMonopoly Slide 3 Perfect Competition Economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. Slide 4 Description of Perfect Competition Efficient outcome Foundation of the theory of supply and demand Market equilibrium Resources and allocated and used efficiently Collective social welfare is maximazed Slide 5 Requirements Atomicity > Small producers & consumers Homogeneity Goods & services are substitutes = no product differentiation Perfect &complete info. Firms & consumers know the prices set by all firms Equal access Production technologies & resources perfectly mobile Free entry Any firm may enter or exit the market Individual buyers and sellers act independently No scope for groups to change price Slide 6 Why does a Perfect Competition firms demand curve is also its marginal revenue curve? For a perfectly competitive firm with no market control, the marginal revenue curve is a horizontal line. Because a perfectly competitive firm is a price taker and faces a horizontal demand curve, its marginal revenue curve is also horizontal and coincides with its average revenue (and demand) curve. Slide 7 Perfect Competition Graph Slide 8 Example of Perfect Competition Example of Perfect Competition eBay auctions can be often be seen as perfectly competitive. There are very low barriers to entry (anyone can sell a product, provided they have some knowledge of computers and the Internet), many sellers of common products and many potential buyers. In the eBay market competitive advertising does not occur, because the products are homogeneous and this would be redundant. However, generic advertising (advertising which benefits the industry as a whole and does not mention any brand names) may occur. Slide 9 Free Software: Example of Perfect Competition Free software works along lines that approximate perfect competition. Anyone is free to enter and leave the market at no cost. All code is freely accessible and modifiable, and individuals are free to behave independently. Slide 10 Monopolistic Competition Slide 11 Characteristics: A large number of firms- it is like perfect competition Entry easy few barriers to entry and exit, so it is unlike monopoly Differentiated products they are therefore closed, but not perfect, substitutes so, they have market power(it means each firm has a unique product) Slide 12 Monopolistic Competition The strategies for Differentiated products Fast-food market Mac Donald's, Taco-Bell, and Wendys Brand Name Brand Name Starbucks Starbucks Slide 13 Monopolistic Competition Price MC ATC MR Q1 P1P1 C=ATC Quantity Abnormal Profit In the Short Run A monopolistically competitive firm faces a Downward-sloping demand curve. The firm maximizes profit by producing Q1, where MR=MC, and charging a price, P1, given by the demand curve above Q1. Profit is the rectangle CBAP1. Demand Implications for the diagram: Above-Normal Profit Above-Normal Profit Slide 14 Monopolistic Competition Implications for the diagram: Normal Profit Price MC ATC MR Q1Q1 AR(D) MR Q2Q2 P Demand Notice that the existence of more substitutes makes the new AR (D) curve more price elastic. The firm reduces output to a point where MC = MR (Q2). At this output AR = AC and the firm will make normal profit. Quantity Slide 15 Monopolistic Competition Price MC ATC D Q1Q1 MR Because there is relative freedom of entry and exit into the market, new firms will enter encouraged by the existence of abnormal profits. New entrants will increase supply causing price to fall. As price falls, the MR curves shift inwards as revenue from each sale is now less. Quantity P1P1 C=ATC Implications for the diagram: Economic Loss Loss Slide 16 Monopolistic Competition Implications for the diagram: Entry and Normal Profit Price MC ATC D2 MR Q2Q2 D 2 =ATC This is the long run equilibrium position of a firm in monopolistic competition. In a monopolistically competitive industry, entering firms produce a close substitute, not an identical or standardized product. Quantity D1 Slide 17 Perfect and Monopolistic Competition Compared Price MC ATC QpcQpc D mc MR mc Q mc P mc Quantity P pc MR pc =D pc The perfectly completive firm produces at the point where the price line, the horizontal MR curve, intersects the MC curve. This is the bottom of the ATC curve in the long run, quantity Q pc at price P pc. The monopolistically competitive firm means that the quantity produced, where MR=MC. The downward- sloping demand curve faced by monopolistically competitive firm means that the quantity produced, Qmc is less than the quantity produced by the perfectly competitive firm, Qpc. The price charged by the monopolistically competitive firm is also higher than that charged by the perfectly competitive firm, Pmc versus Ppc. In both cases, however, the firms earn only a normal profit. Slide 18 Monopolistic Competition In each case there are many firms in the industry Each can try to differentiate its product in some way Entry and exit to the industry is relatively free Consumers and producers do not have perfect knowledge of the market the market may indeed be relatively localised. Slide 19 Monopolistic Competition Restaurants Plumbers/electricians/local builders Private schools Plant hire firms Insurance brokers Health clubs Hairdressers Estate agents Damp proofing control firms Slide 20 An OLIGOPOLY is a market form in which a market or industry is dominated by a small number of sellers(Oligopolists) Slide 21 Example of Oligopoly around our life in U.S.A. Slide 22 Fast foods McDonalds, Burger King, KFC McDonalds, Burger King, KFC Slide 23 Bookstores Amazon, Barnes & Noble Slide 24 Oils Shell, ExxonMobil Slide 25 Electrical goods SONY, Dell Slide 26 Mobile phone networks Verizon, AT&T Slide 27 Characteristics of Oligopoly Product Branding Entry barriers Interdependent decision-making Non-price competition Slide 28 Oligopsony A market dominated by many sellers and a few buyers Slide 29 Definition of Oligopsony An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in market for inputs where a small number of firms are competing to obtain factors of production. It contrasts with an oligopoly, where there are many buyers but just a few sellers. An oligopsony is a form of imperfect competition. Slide 30 Cocoa: Example of Oligopsony Slide 31 Three Buyers of Cocoa Bean Three firms buy the vast majority of world cocoa bean production, mostly from small farmers in third-world countries. Slide 32 Tobacco in US: Example of Oligopsony Slide 33 Three Major Buyers of Tobacco in US Three companies (Altria, Brown & Williamson, and Lorillard Tobacco Company) buy almost 90% of all tobacco grown in the US. Slide 34 Characteristics of Oligopsony The buyers have a major advantage over the sellers. They can play off one supplier against another, thus lowering their costs. They can also dictate exact specifications to suppliers, for delivery schedules, quality, and (in the case of agricultural products) crop varieties. They also pass off much of the risks of overproduction, natural losses, and variations in cyclical demand to the suppliers. Slide 35