MARKET STRUCTURES

Presented by

Martin, Otundo Richard---HD417-C005-0151/15Kathata, Patrick Meeme---HD417-C005-2983/15Kazungu Johnson ---HD417 – C005 - 0115/2015

PhD 2015

COURSE LECTURER: Dr. Sakwa

General Objective:The focus of this lecture is the four market structures. Students will learn the characteristics of pure competition, pure monopoly, monopolistic competition, and oligopoly.

SPECIFIC OBJECTIVES: To,

1. Identify various determinants of various market structures.2. Be able to categorize the various models of market structure.3. Describe the assumptions of these market structures.4. Explain the relevance of these market structures.

Market Structures Definition Marketing is the activity, set of institutions, and processes for

creating, communicating, and delivering and exchanging offerings that have value for customers, clients, partners, and, society at large( American Marketing Association).

Market structure is defined by economists as the characteristics of the market.

It can be organizational characteristics or competitive characteristics or any other features that can best describe a goods and services market.

The major characteristics that economist have focused on in describing the market structures are the nature of competition and the mode of pricing in that market.

Market structures can also be described as the number of firms in the market that produce identical goods and services.

The market structure has great influence on the behavior of individuals firms in the market.

Features of market structure The number of firm operating in a market; It will cover both the

local and foreign markets. The concentration ratio of company; this will show the market

share held by the large companies. The amount and nature of costs in the market; It will show how

the different costs affect the contestability in the market. It will include the economies of scale and the presence of sunk costs.

The degree of vertical integration; Vertical integration is the process of combining the different stages of production and distribution to be managed by a single enterprise.

The levels of product differentiation The market churn or the customer’s turnover; this will give the

number of consumer that are willing to change their consumers over a specific period of time when there are market changes. The market rate of market churn is an indicator of the level of brand loyalty and influence of marketing and advertising on customer’s choice.

The Four Major Market StructuresMonopoly: A monopoly exists when one company and one only provides services in a particular industry, or one company dominates and consumers cannot substitute anything that comes close. Today, very few industries are monopolies. Utility companies such as water companies or electric companies may be considered monopolies. Consumers can't exactly substitute something else for electricity from the local provider, unless they switch to firewood and candles!

Oligopoly: An oligopoly consists of only a handful of companies selling similar products. Consumers can substitute products, but only one company's offerings for another. An example would be the three big American car companies of today: Ford, GM and Chrysler.

Monopolistic Competition: In monopolistic competition, many sellers sell different products. It's very similar to competition, below, with the exception that the products themselves are a bit different from one another, so consumers look for those differences rather than price differences.

Competition: In markets with perfect competition, there are no barriers to entry, and many offering different goods. Consumers often shop on price differences alone. Wal Mart may be viewed as a purely competitive company within the grocery industry for its super centers that offer lower prices than competing grocery chains.

Major Factors which Determine the Market Structure of an Industry1. Number of Buyers and Sellers:Number of buyers and sellers of a commodity in the market indicates the influence exercised by them on the price of the commodity. In case of large number of buyers and sellers, an individual buyer or seller is not in the position to influence the price of the commodity. However, if there is a single seller of a commodity, then such a seller exercises great control over the price.2. Nature of the Commodity:If the commodity is of homogeneous nature, i.e. identical in all respects, then it is sold at a uniform price. However, if the commodity is of differentiated nature (like different brands of toothpaste), then it may be sold at different prices. Again, if the commodity has no close substitutes (like Railways), then the seller can charge higher price from the buyers.

3. Knowledge of Market Conditions:If buyers and sellers have perfect knowledge about the market conditions, then a uniform price prevails in the market. However, in case of imperfect knowledge, sellers are in a position to charge different prices.4. Mobility of Goods and Factors of Production:When the factors of production can move freely from one place to another, then a uniform price prevails in the market. However, in case of immobility of goods and factors, different prices may prevail in the market.

5. Freedom of Movement of Firms:If there is freedom of entry and exit of firms, then price will be stable in the market. However, if there are restrictions on entry of new firms and exit of old firms, then a firm can influence the price as it has no fear of competition from other or new firms.

MODELS OF MARKET STRUCTURES i. Monopolistic competition, a type of imperfect competition such that

many producers sell products or services that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms

ii. Oligopoly, in which a market is run by a small number of firms that together control the majority of the market share.i. Duopoly, a special case of an oligopoly with two firms.

iii. Monopsony, when there is only a single buyer in a market.iv. Oligopsony, a market where many sellers can be present but meet only

a few buyers.v. Monopoly, where there is only one provider of a product or service.

i. Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms.

vi. Perfect competition, a theoretical market structure that features no barriers to entry, an unlimited number of producers and consumers, and a perfectly elastic demand curve.(N/B: This Done in Above)

What are the main assumptions for a perfectly competitive market?

• Many sellers in the market - each of whom produce a low percentage of market output and cannot influence the prevailing market price – each firm in this market is a price taker - i.e. it has to take the market price

• Many individual buyers - none has any control over the market price

• Perfect freedom of entry and exit from the industry. Firms face no sunk costs and entry and exit from the market is feasible in the long run. This assumption means that all firms in a perfectly competitive market make normal profits in the long run

• Homogeneous products are supplied to the markets that are perfect substitutes. This leads to each firms being “price takers" with a perfectly elastic demand curve for their product

• Perfect knowledge – consumers have all readily available information about prices and products from competing suppliers and can access this at zero cost – in other words, there are few transactions costs involved in searching for the required information about prices. Likewise sellers have perfect knowledge about their competitors

• Perfectly mobile factors of production – land, labour and capital can be switched in response to changing market conditions, prices and incentives. We assume that transport costs are insignificant

• No externalities arising from production and/or consumption

Model Assumptions: Monopolistic Competition. Many, many firms produce in a monopolistically competitive industry.

This assumption is similar to that found in a model of perfect competition.

Each firm produces a product that is differentiated (i.e., different in character) from all other products produced by the other firms in the industry. Thus one firm might produce a red toothpaste with a spearmint taste, and another might produce a white toothpaste with a wintergreen taste. This assumption is similar to a monopoly market that produces a unique (or highly differentiated) product.

The differentiated products are imperfectly substitutable in consumption. This means that if the price of one good were to rise, some consumers would switch their purchases to another product within the industry. From the perspective of a firm in the industry, it would face a downward-sloping demand curve for its product, but the position of the demand curve would depend on the characteristics and prices of the other substitutable products produced by other firms. This assumption is intermediate between the perfectly competitive assumption in which goods are perfectly substitutable and the assumption in a monopoly market in which no substitution is possible.

Cont There is free entry and exit of firms in response to profits in the

industry. Thus firms making positive economic profits act as a signal to others to open up similar firms producing similar products. If firms are losing money (making negative economic profits), then, one by one, firms will drop out of the industry. Entry or exit affects the aggregate supply of the product in the market and forces economic profit to zero for each firm in the industry in the long run. (Note that the long run is defined as the period of time necessary to drive the economic profit to zero.) This assumption is identical to the free entry and exit assumption in a perfectly competitive market.

There are economies of scale in production (internal to the firm). This is incorporated as a downward-sloping average cost curve. If average costs fall when firm output increases, it means that the per-unit cost falls with an increase in the scale of production. Since monopoly markets can arise when there are large fixed costs in production and since fixed costs result in declining average costs, the assumption of economies of scale is similar to a monopoly market.

Assumptions of Oligopoly

Few firms dominate an industry. Large proportion of industry's output is

shared by a few firms. High barriers to entry may be due to

economics of scale, legal barriers, aggressive tactics such as advertising or high startup costs

Products may be identical or differentiated. Firms are interdependent and take careful

notice of each other's actions.

1. Seller Influence on price- Sellers are price makers2. Extent of strategic behaviour -Sellers do not behave strategically.3. Conditions of Entry -Entry into the market is completely blocked4. Buyer Influence on Price-Buyers are price takers

Assumptions of the Monopoly Model

Perfectly Competitive Market Model Assumptions

Many small producers such that no one can influence price. Firms are price takers in the market. So many firms that no one firm can influence price Homogeneous product Factor (Resource) mobility

Cont. .Perfect information - no trademarks, patents, exclusive knowledge Market entry and exitNo government influence or interferenceRationality of all market actors (maximize utility)Prices determined by the interaction of supply & demand

Relevance of Monopoly as Market structure Stability of prices in a monopoly market the prices are most

of the times stable. Because there is only one firm involved in the market that sets the prices if and when it feels like.

Source of revenue for the government in form of taxation from monopoly firms.

Massive profits due to the absence of competitors which leads to high number of sales monopoly firms tend to receive super profits from their operations.

Monopoly firms offer some services effectively and efficiently.

Relevance of the market structures

Oligopoly refers to an industry dominated by a small number of sellers with market power.

They have the ability to limit or discount competition, and artificially earn excess profits.

U. S. cell phone providers are often cited as a clear example of oligopoly, as the major providers effectively control the market.

They set market prices for their goods or services. 

Relevance of Oligopoly

In Kenya Safaricom and other telecommunications almost controls the rates of communication within the telecommunication industry.

Airline like KQ tends to look like it sets the base of business in the country and many more.

Cellphone companies Large Banks(AfDB, Equity Bank, Barclays). Large Credit Agencies (Visa, Mastercard, Discover) They are oligopolies because they have control of and effect the

market in the same way a single company controls a market with a monopoly - its the same thing end effect - just more than one company.

Cont.

In the real world it is hard to find examples of industries which fit all the criteria of ‘perfect knowledge’ and ‘perfect information’. However, some industries are close.

Foreign exchange markets. Here currency is all homogeneous. Also traders will have access to many different buyers and sellers. There will be good information about relative prices. When buying currency it is easy to compare prices

Relevance of perfect competition

Agricultural markets. In some cases, there are several farmers selling identical products to the market, and many buyers. At the market, it is easy to compare prices. Therefore, agricultural markets often get close to perfect competition.

Internet related industries. The internet has made many markets closer to perfect competition because the internet has made it very easy to compare prices, quickly and efficiently (perfect information). Also, the internet has made barriers to entry lower. For example, selling a popular good on internet through a service like e-bay is close to perfect competition. It is easy to compare the prices of books and buy from the cheapest. The internet has enable the price of many books to fall in price, so that firms selling books on internet are only making normal profits.

Cont.

Toothpaste Market: When you walk into a departmental store to buy

toothpaste, you will find a number of brands, like Aquifresh, Colgate, Whitedent, Paradox, etc.

i. On one hand, the market for toothpaste seems to be full of competition, with thousands of competing brands and freedom of entry.ii. On the other hand, its market seems to be monopolistic, due to uniqueness of each toothpaste and power to charge different price. Such a market for toothpaste is a monopolistic

competitive market.

Example of Monopolistic Competition:

In summary, In many markets, such as toothpastes and toilet paper, producers practice product differentiation by altering the physical composition of products, using special packaging, or simply claiming to have superior products based on brand images or advertising.

Cont. of examples of Monopolistic Competition:

MARKET STRUCTURE

NUMBER OF FIRMS

TYPE OF PRODUCT

ENTRY INTO INDUSTRY

FIRM'S INFLUENCE OVER PRICE

EXAMPLES

PERFECT COMPETITION MANY IDENTICAL EASY NONE AGRICULTURAL 

CROPS

MONOPOLISTIC COMPETITION MANY DIFFERENTIATED EASY MODERATE MANY LOCAL 

RETAIL OUTLETS

OLIGOPOLY FEWEITHER IDENTICAL OR DIFFERENTIATED

DIFFICULTMODERATE TO SUBSTANTIAL

AUTOMAKERS

MONOPOLY ONE UNIQUE IMPOSSIBLE SUBSTANTIAL LOCAL UTILITY

Summary of the Discussion

Amacher, R., & Pate, J. (2013). Microeconomics Principles and Policies. San Diego, CA: Bridgepoint Education, Inc.

Diaw, D., & Lessoua, A. (2013). Natural Resources Exports, Diversification and Economic Growth of CEMAC Countries: On the Impact of Trade with China. African Development Review/Revue Africaine De Developpement, 25(2), 189-202.

References

THANK YOU

END