3.1 Market Structure.ppt
Business Environment,Unit 4Market Structure,OUTCOME 3.1,Explain how market structures in practice deviate from the model of perfect competition Explain the model of perfect competition and its characteristics.Explain the common market structure in practice.Explain the deviation from perfect competition.It is suggested to compare their characteristics,such as the number of sellers,comparability of goods,market power,information and entry of the market.,Market Demand,The demand for a good or service is defined as:Quantities of a good or service that people are ready(willing and able)to buy at various prices within some given time period,other factors besides price held constant.,Market Demand,Market demand is the sum of all the individual demands.,The inverse relationship between price and the quantity demanded of a good or service is called the Law of Demand.,Market Demand,Changes in price result in changes in the quantity demanded.This is shown as movement along the demand curve.,Market Demand,Changes in nonprice determinants result in changes in demand.This is shown as a shift in the demand curve.,Market Demand,Nonprice determinants of demandTastes and preferencesIncomePrices of related productsFuture expectationsNumber of buyers,Market Demand,Market Supply,The supply of a good or service is defined as:Quantities of a good or service that people are ready to sell at various prices within some given time period,other factors besides price held constant.,Changes in price result in changes in the quantity supplied.This is shown as movement along the supply curve.,Market Supply,Changes in nonprice determinants result in changes in supply.This is shown as a shift in the supply curve.,Market Supply,Nonprice determinants of supplyCosts and technologyPrices of other goods or services offered by the sellerFuture expectationsNumber of sellersWeather conditions,Market Supply,Market Equilibrium,We are now able to combine supply with demand into a complete analysis of the market.,Market Equilibrium,Equilibrium price:The price that equates the quantity demanded with the quantity supplied.Equilibrium quantity:The amount that people are willing to buy and sellers are willing to offer at the equilibrium price level.,Market Equilibrium,Shortage:A market situation in which the quantity demanded exceeds the quantity supplied.A shortage occurs at a price below the equilibrium level.,Market Equilibrium,Surplus:A market situation in which the quantity supplied exceeds the quantity demanded.A surplus occurs at a price above the equilibrium level.,Market Equilibrium,Determinants of market Structure,Freedom of entry and exit Nature of the product homogenous(identical)、differentiated？Control over Supply/outputControl Over priceBarriers to entry,Pure Competition:Market structure characterized by homogeneous products in which there are so many buyers and sellers that none has a significant influence on priceMonopolistic Competition:Market structure involving a heterogeneous product and product differentiation among competing suppliers,allowing the marketer some degree of control over prices,Four Market Structures,Oligopoly:Market structure involving relatively few sellers and barriers to new competitors due to high start-up costsMonopoly:Market structure involving only one seller of a good or service for which no close substitutes exist,Four Market Structures,Market Structure Continuum,FOUR MARKET MODELS,Pure Competition,Market Structure Continuum,PureCompetition,FOUR MARKET MODELS,Imperfect Competition,All Markets that areNot Purely Competitive,Market Structure Continuum,PureCompetition,FOUR MARKET MODELS,Pure Monopoly,Market Structure Continuum,PureCompetition,PureMonopoly,FOUR MARKET MODELS,Monopolistic Competition,Market Structure Continuum,PureCompetition,PureMonopoly,MonopolisticCompetition,FOUR MARKET MODELS,Oligopoly,Market Structure Continuum,PureCompetition,PureMonopoly,MonopolisticCompetition,Oligopoly,FOUR MARKET MODELS,Pure Competition:,-Very Large Numbers-Standardized Product-“Price Takers”-Free Entry and Exit,Free entry and exit to industry Homogenous product identical so no consumer preferenceLarge number of buyers and sellers no individual seller can influence priceSellers are price takers have to accept the market price Perfect information available to buyers and sellers,Perfect Competition,FOUR MARKET MODELS,Pure Monopoly:,-Single Seller-No Close Substitutes-Price Maker-Blocked Entry-Nonprice Competition,High barriers to entryFirm controls price OR output/supplyAbnormal profits in long run Possibility of price discriminationConsumer Choice limited Prices in excess of MC,Monopoly,What is a Monopoly?,A monopoly is a market structure in which there is a single supplier of a product.The monopoly firm(monopolist):May be small or large.Must be the ONLY supplier of the product.Sells a product for which there are NO close substitutes.Monopolies are fairly common:U.S.Postal Service,local utility companies,local cable providers,etc.,Introduction,Monopoly is a market structure in which a single firm makes up the entire market.Monopolies exist because of barriers to entry into a market that prevent competition.,The Creation of Monopolies,Monopolies often arise as a result of barriers to entry.Barrier to entry:anything that impedes the ability of firms to begin a new business in an industry in which existing firms are earning positive economic profits.There are three general classes of barriers to entry:Natural barriers,the most common being economies of scaleActions by firms to keep other firms outGovernment(legal)barriers,Economies of Scale,In some industries,the larger the scale of production,the lower the costs of production.Entrants are not usually able to enter the market assured of or capable of a very large volume of production and sales.This gives incumbent firms a significant advantage.Examples are electric power companies and other similar utility providers.,A Monopolistic Market,Barriers to entry into the market prevent competition,Monopoly is a market structure in which one firm makes up the entire market,There are no close substitutes for the monopolists product,Barriers to entry can be:LegalSociologicalNaturalTechnological,15-34,Economies of Scale,Actions by Firms,Entry is barred when one firm owns an essential resource.Examples are inventions,discoveries,recipes,and specific materials.Microsoft owns Windows,and has been challenged by the U.S.Dept.of Justice as a monopolist.,Government,Governments often provide barriers,creating monopolies.As incentives to innovation,governments often grant patents,providing firms with legal monopolies on their products or the use of their inventions or discoveries for a period of 17 years.,another way to look at barriers,Legal barriers,such as patents,prevent others from entering the market.Sociological barriers entry is prevented by custom or tradition.Natural barriers the firm has a unique ability to produce what other firms cant duplicate.Technological barriers the size of the market can support only one firm.,Types of Monopolies,Natural monopoly:A monopoly that arises from economies of scale.The economies of scale arise from natural supply and demand conditions,and not from government actions.Local monopoly:a monopoly that exists in a limited geographic area.Regulated monopoly:a monopoly firm whose behavior is overseen by a government entity.Monopoly power:market power,the power to set prices.Monopolization:an attempt by a firm to dominate a market or become a monopoly.,FOUR MARKET MODELS,Monopolistic Competition:,-Relatively Large Number of Sellers-Differentiated Products-Easy Entry and Exit,Many buyers and sellers Products differentiatedRelatively free entry and exitEach firm may have a tiny monopoly because of the differentiation of their product Firm has some control over price,Monopolistic Competition,FOUR MARKET MODELS,Oligopoly:,-A Few Large Producers-Homogeneous or Differentiated ProductsControl Over Price,But Mutual InterdependenceStrategic BehaviorEntry Barriers,Industry dominated by small number of large firmsMany firms may make up the industryHigh barriers to entryProducts could be highly differentiated branding or homogenous Non-price competition Price stability within the marketPotential for Collusion?Abnormal profitsHigh degree of interdependence between firms,Oligopoly,Oligopoly,A market with a few sellers.The essence of an oligopolistic industry is the need for each firm to consider how its own actions affect the decisions of its relatively few competitors.Oligopoly may be characterized by collusion or by non-co-operation.,Collusion and cartels,COLLUSIONan explicit or implicit agreement between existing firms to avoid or limit competition with one another.CARTELis a situation in which formal agreements between firms are legally permitted.e.g.OPEC,Collusion is difficult if,There are many firms in the industryThe product is not standardizedDemand and cost conditions are changing rapidlyThere are no barriers to entryFirms have surplus capacity,More on collusion,The probability of cheating may be affected by agreement or threats.Pre-commitmentan arrangement,entered voluntarily,restricting future options.Credible threata threat which,after the fact,is optimal to carry out.,Features of the Four Market Structures,四类市场结构的特征,Measuring Market Structure,Main Elements of Market StructureSeller ConcentrationProduct DifferentiationBarriers to EntryAdditional Elements of Market StructureBuyer ConcentrationHigh Sunk Costs or Barriers to ExitGrowth Rate of Market DemandImport Competition,Seller Concentration Measures,n-firm concentration ratioHerfindahl-Hirschman Index,n-firm concentration ratio,Sales of top n firms/Sales in the industryExamplesC4=Sales of top 4 firms/Sales of industryC8=Sales of top 8 firms/Sales of industry,Herfindahl-Hirschman Index,HHI=wi2 Where,w=market sharePurpose:The HHI is designed to capture asymmetries in competition.,Product Differentiation,Products are different if there is some objective characteristic or property,real or perceived,that provides a basis for buyers to choose one over the other.Product differentiation may lead to reduced own-price elasticity.As the degree of differentiation increases,the price elasticity will decrease.Demonstrate graphically and mathematically the impact product differentiation has on own-price elasticity.,Ways in which products are differentiated.Product BrandPackagingConditions of SaleService ProvidedLocationProduct Differentiation as an Entry StrategyProduct differentiation to create a niche market.Product differentiation to deter entry.Note:Before discussing this latter issue,we need to discuss barriers to entry.,Product Differentiation,Barriers to Entry,Measuring Barriers to EntryTypes of Barriers to EntryScale Economy Absolute CostProduct Differentiation,Measuring Barriers to Entry,Limit Price-highest price a firm can charge without potential competitors entering.Limit price is a measure of entry barriers.Distance between market price and competitive price indicates strength of barriers.Determine monopoly price and competitive price.Pm=Price(according to demand)when MR=MCPc=Price=MC=ACCloser you are to Pm,higher are the barriers to entry.Closer you are to Pc,lower are the barriers to entry.To some extent the Lerner Index can be used to measure barriers to entry.,Scale Economy Barriers to Entry,Begin with long-run average total cost(L-Shaped curve)Three firms produce OB where OB occurs at minimum Average CostIndustry output=OM.(OM=3*OB)New Firm:Can produce OB if builds plant large enough.New firm must take away 1/3 from each to pull even,yet all 4 may now be operating at a loss(assuming a constant output price).New Firm:Can produce OA by building a smaller plant,but faces higher Avg.Cost.This would allow it to break into the market,since its market share is insignificant.Either solution puts the new firm at a disadvantage.Summary:The greater OB is relative to OM,the higher are the barriers to entry;furthermore,the higher the cost curve rises to the left of OB,the higher are barriers to entry.,Absolute Cost Barriers to Entry,Absolute Cost Barriers to Entry:Existing firm has a cost advantage at every level of output.Absolute cost barriers are measured by the distance between the average cost curves of the existing and entering firms.The greater the distance,the greater the barriers to entry.Why do these differences exist?Production Know-How Patented Processes(New firm must use older methods)Limited Supply of an Input(via Contract)Cost of Capital to a new firms:Banks charge new firms higher rate.,Product Differentiation Barriers to Entry,Product differentiation produces distances between demand curves.The strength of entry barriers is measured by the distance between the demand curves.Elements of model:Two demand curves(old firms,new firm)One average cost curveKey:If existing firms price is too low,demand for new firm may not be sufficient to cover costs.The existing firm can charge a higher price,but knows that the higher price may allow entry of the new firm.Why does such a barrier to entry exist?1.Scale economies in advertising.Older firms ad$goes farther.2.New firms advertising must not only convince customer that they are as good,but they must be better.3.To overcome scale economies in production,the new firms advertising outlay will inflate the firms total cost;hence creating or elevating the existing firms absolute cost advantage.,Buyer Concentration,Countervailing power Where power becomes concentrated in the economy,a counter force will develop to counteract this power.From the work of John Kenneth Galbraith.Example:Big Business and UnionsMonoposony a single buyer in a marketREVIEW THE MONOPOSONY MODELHow would price be determined if a monopoly faced a monoposony?Via bargaining,Barriers to Exit,If a firm faces high sunk costs(costs that cannot be recovered)then it has an incentive not to exit the industry.If a firm knows it will incur high sunk costs,it may prevent the firm from entering the industry.In other words,sunk costs increase risk.Why?If fixed costs comprise much of average cost,then even a small reduction in price can cause a firm to earn below normal profits.One should note that one cannot have barriers to entry without barriers to exit.In other words,entrants must know that incumbents are not likely to leave the industry.,Demand Growth and Import Competition,How do firms behave when industry demand grows rapidly?New entrants are irrelevant since enough demand exists for everyone.Next years demand is related to this years demand,so defense of current market share becomes important.Former response is most frequently found.industry demand is stable over time?industry demand is declining?How do firms react to import competition?Should governments restrict import competition?,市场结构分析,第一节 完全竞争市场第二节 完全垄断市场第三节 垄断竞争市场第四节 寡头垄断市场,2023/2/8,完全竞争市场,市场与市场结构完全竞争市场中的短期均衡完全竞争市场中的长期均衡消费者剩余、生产者剩余与政府规制纯粹竞争,2023/2/8,什
