Market Structure (N3)

GROUP MEMBERVõ Thị Thanh PhươngHồ Xuân Thảo NguyênTrần Thục VănVõ Hoàng Ngọc UyênPhan Huỳnh Mỹ Tiên

UNIT 18

MARKET STRUCTURES AND COMPETITION

MARKET STRUCTURE

• What is the market structure?

The state of a market with respect to competition• Why does the market need the competition?

MARKET STRUCTURE

• What are the main criteria which are used to distinguish the different market structure?

• The number and size of producers and consumers• The type of goods and services• The information

MARKET STRUCTURES

• Market structures are including:• Perfect competition

• Monopolistic competition

• Oligopoly

• Monopoly

• Oligopsony

• Monopsony

PERFECT COMPETITION

• Definition of Perfect competition:

• A market in which there are many small firms, all producing homogeneous goods.

• No single firm has influence on the price of the product it sells.

PERFECT COMPETITION

• Feature of Perfect competition• Many buyers / Many sellers• Homogeneous Products• Low-entry / exit barriers• Perfect information – For both consumers and

producers• Firms aim to maximize

PERFECT COMPETITION

• Advantages of perfect competition:• High degree of competition helps allocate resources to

most efficient use• Price = marginal costs• Competition encourages efficiency• Firms operate at maximum efficiency• Consumers benefit: consumers charged a lower price• Responsive to consumer wishes: Change in demand,

leads extra supply

PERFECT COMPETITION

• Disadvantage of perfect competition:

• The conditions for perfect competition are very strict, there are few perfectly competitive markets

• Insufficient profits for investment

• Lack of product variety

• Lack of competition over product design and specification

• Unequal distribution of goods & income

• Externalities e.g. Pollution

MONOPOLISTIC COMPETITION

What is Monopolistic Competition?

Monopolistic Competition, also called competitive market, where there are a large number of independent firms which have a very small proportion of the market share


Characteristics of Monopolistic Competition • There are many buyers and sellers.• Products differentiated.


• There are few barriers to entry and exit.

• Each firms may have a tiny “monopoly”.

• Firm has some control over price.


Monopolistic Competition Examples: books, restaurants, grocery stores, shoes, clothing, coffee, chocolate…


Monopolistic Competition and Perfect Competition.• Monopolistic competitive firms produce products that are

not perfect substitutes or are at least perceived to be different to all other brands products.

• Unlike in perfect competition, the monopolistic competitive firm does not produce at the lowest possible average total cost

• Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. While monopolistic competition is inefficient, perfect competition is the most efficient, with supply meeting demand and production therefore matching this, so stock is not sat in storage for prolonged periods or going to waste

MONOPOLY

Definition ( economics) • a market in which there are many buyers but only

one seller

MONOPOLY’S CHARACTERISTICS

• A single firm selling all output in a market : it is a direct contrast to perfect competition.

• Unique product:• Barriers to Entry and Exit.

• Government license or franchise• Resource ownership• Patent and copyrights• High start- up cost• Decreasing average total cost

• Specialized information

ADVANTAGES OF MONOPOLY

• Import the products and compete with foreign companies

• Complete freedom in selecting prices or quantity • No guarantee of profitability........ there is only one

firm

DISADVANTAGES OF MONOPOLY

• The prices charged even increase prices • Reduce the quality of the products • Reduce the satisfaction of the customers • Cause many disadvantages for the employees of the

company

Monopoly

OLIGOPOLY

• A market/industry dominated by a small number of sellers (oligopolists)

• Decisions of one firm --influence-- decisions of other firms

CARTEL

• A formal(explicit) agreement among firms• A formal organization of producers who agree to

coordinate prices and production.

CARTEL MEMBERS AGREE ON

• Price fixing• Total industry output• Market shares• Allocation of customers• Allocation of territories• Bid rigging• Division of profits

Increase individual member’s profit by reducing competition

Firm B normal advertising

Firm B aggressive advertising

Firm A normal advertising

earns $50 profit A: $0 profitFirm B: $80 profit

Firm A aggressive advertising

A: $80 profitFirm B: $0 profit

earns $15 profit

6 movie studios receive 90% of American film revenues U.S./Canada market share(2008)

18.4%13.2%

12.4%

16.4%12.7%

10.5%

4 major music companies receive 80% of recording revenues

Television industry

1950s 1970s

Today

3 leading food processing companies

In Vietnam

OLIGOPSONY

• Few buyers & many sellers• A form of imperfect competition

OLIGOPSONY

• Ex: cocoa

• Ex: tobacco

MONOPSONY

• Single buyer faces many sellers• A form of imperfect competition• Monopolist becomes monopsonist

• Sells products with higher price• Buys material with lower price

OLIGOPSONY & MONOPSONY

• Play off one supplier against another => lower cost• Dictate exact specifications to suppliers• Don’t have risks

CONCLUSION

• Market structure can be described with reference to different characteristics of a market, including its size and value, the number of providers and their market share, consumer and business purchasing behavior, and growth forecasts

CONCLUSION

Market Structure

Seller Entry Barriers

Seller Number

Buyer Entry Barriers

Buyer Number

Perfect Competition

No Many No Many

Monopolistic competition

No Many No Many

Oligopoly Yes Few No ManyOligopsony

No Many Yes Few

Monopoly Yes One No ManyMonopsony

No Many Yes One

ANSWER KEY

• 1b1. Market leaders

2. How to keep the market leaders position

3. Market challengers

4. Market followers

5. Disadvantages of vulnerable market followers

ANSWER KEY

• 1c• 2nd summary: most accurately summarizes the text• 3rd summary: wrong

ANSWER KEY

• 1d1. share2. promotion3. monopoly4. entire market5. unique selling proposition6. segmentation7. niche8. competency9. turnover10. recession

ANSWER KEY

2a1. Perfect competition2. Monopoly3. Monopsony4. Natural monopoly5. Monopolistic6. Oligopoly 7. Economic of scale8. Barriers to entry9. Dominant-firm oligopoly10. Cartel

ANSWER KEY

2c L – J – F – M - C D – I – B K – E – G – H - A

Market Structure (N3)

Education

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