35.1 Market Structures and Their Characteristics
• Market Structure: The way in which a market is organised in terms of certain characteristics which can be used to explain the behaviour of
firms in a market
◦ Number of buyers and sellers
◦ Nature of products and if they are differentiated
◦ Ease of entry and exit in the market
◦ The extent to which information is available to firms in the market
• Perfect Competition: An ideal market structure that has many buyers and sellers, identical products, no barriers to entry
◦ Firms are all price takers and have perfect information
• Monopolistic Competition: A market structure where there are many firms, differentiated products and few barriers to entry
◦ Firms have some control over product type and price, they are price makers
• Oligopoly: A market structure with few firms and high barriers to entry
◦ They can deter competition and have wide ranging products.
• Pure Monopoly: Where there is just one seller in the market
◦ Large barriers to entry, dominant market share, limited information, price maker
• Natural Monopoly: A falling long-run average cost means it makes sense to have only one firm selling a good or service
• Ways to identify types of Market Structures
◦ Counting number of firms, larger the number the closer to perfect competition
◦ Concentration Ratio: Measure of the combined market share of a number of the biggest firms
‣ CR5 = Market share of 5 biggest firms/Total market share x 100%
◦ Considering how difficult it is for new firms to enter
◦ Considering the importance of economies of scale
35.2 Barriers to Entry and Exit
• Legal Barriers
◦ If the industry is state owned or produced under license from the government
◦ Natural monopoly - efficient to have a monopoly
◦ Patents
• Market Barriers
◦ Advertising and brand loyalty
• Cost Barriers
◦ Only large firms able to fund the necessary investment for certain industries
◦ Economic of scale can become a barrier to entry
◦ Predatory Pricing: Where a firm sells its goods below average variable cost to force competitors out of the market
◦ Limit Pricing: Where firms deliberately lower prices and abandon profit maximisation to stop new firms entering market
◦ Collusion: An anti-competitive action by producers
• Physical Barriers
◦ Some firms have monopoly access to particular raw materials
◦ Vertically integrated firms
• Barriers to Exit
◦ RnD costs cannot be recovered and resources aren’t transferred easily
◦ Sunk costs are too high to allow a firm to exit easily
35.3 Performance of Firms in Different Market Structures
PERFECT COMPETITION
• Market Structure: The way in which a market is organised in terms of certain characteristics which can be used to explain the behaviour of
firms in a market
◦ Number of buyers and sellers
◦ Nature of products and if they are differentiated
◦ Ease of entry and exit in the market
◦ The extent to which information is available to firms in the market
• Perfect Competition: An ideal market structure that has many buyers and sellers, identical products, no barriers to entry
◦ Firms are all price takers and have perfect information
• Monopolistic Competition: A market structure where there are many firms, differentiated products and few barriers to entry
◦ Firms have some control over product type and price, they are price makers
• Oligopoly: A market structure with few firms and high barriers to entry
◦ They can deter competition and have wide ranging products.
• Pure Monopoly: Where there is just one seller in the market
◦ Large barriers to entry, dominant market share, limited information, price maker
• Natural Monopoly: A falling long-run average cost means it makes sense to have only one firm selling a good or service
• Ways to identify types of Market Structures
◦ Counting number of firms, larger the number the closer to perfect competition
◦ Concentration Ratio: Measure of the combined market share of a number of the biggest firms
‣ CR5 = Market share of 5 biggest firms/Total market share x 100%
◦ Considering how difficult it is for new firms to enter
◦ Considering the importance of economies of scale
35.2 Barriers to Entry and Exit
• Legal Barriers
◦ If the industry is state owned or produced under license from the government
◦ Natural monopoly - efficient to have a monopoly
◦ Patents
• Market Barriers
◦ Advertising and brand loyalty
• Cost Barriers
◦ Only large firms able to fund the necessary investment for certain industries
◦ Economic of scale can become a barrier to entry
◦ Predatory Pricing: Where a firm sells its goods below average variable cost to force competitors out of the market
◦ Limit Pricing: Where firms deliberately lower prices and abandon profit maximisation to stop new firms entering market
◦ Collusion: An anti-competitive action by producers
• Physical Barriers
◦ Some firms have monopoly access to particular raw materials
◦ Vertically integrated firms
• Barriers to Exit
◦ RnD costs cannot be recovered and resources aren’t transferred easily
◦ Sunk costs are too high to allow a firm to exit easily
35.3 Performance of Firms in Different Market Structures
PERFECT COMPETITION
