basic theories of market structure

1. Presented by
Martin, Otundo Richard---HD417-C005-0151/15
Kathata, Patrick Meeme---HD417-C005-2983/15
Kazungu Johnson ---HD417 – C005 - 0115/2015
PhD 2015
COURSE LECTURER: Dr. Sakwa

2. 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.

3. 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.

4. 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

5. 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.

6. The Four Major Market Structures
Monopoly: 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.

7. Major Factors which Determine the Market Structure of an Industry
1. 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.

8. 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.

9. 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.

10. 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)

11. 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

12. 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.

13.  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.

14.  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.

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

16. 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

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

18. 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.

19.  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.

20.  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.

21.  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

22.  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.

23. 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.

24. 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.

25. 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 FEW
EITHER
IDENTICAL OR
DIFFERENTIATED
DIFFICULT
MODERATE
TO
SUBSTANTIAL
AUTOMAKERS
MONOPOLY ONE UNIQUE IMPOSSIBLE SUBSTANTIAL LOCAL UTILITY

26.  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.

27. THANK YOU