Market Structures: Perfect Competition, Monopoly, Oligopoly, and Monopolistic Competition

Understand the models of Perfect Competition, Monopoly, Oligopoly & Monopolistic Competition.
Understand the various profits earned by the above market structures in the Short Run (SR) & Long Run (LR).
Understand the various forms of price discrimination and its effects.

Questions to trigger last week’s key learning points:
- List some costs in the SR & LR which are incurred by a firm.
- Differentiate between Economies of Scale (EOS) & Diseconomies of Scale (DEOS).

Many buyers and sellers.
The product sold is homogeneous (similar in price & quality) – e.g., water bottle market.
Perfect knowledge - buyers and sellers have perfect knowledge about their respective principles.
Freedom of entry and exit - entry and exit costs are on a very low ceiling.
Price taker – the price is determined by the demand and supply forces.
Allocation of resources is efficient (no wastages created, resources are well utilized - Demand = Supply) as price is equal to marginal cost $(P=MC)$ .
No advertising cost.
Can earn supernormal profit in the SR if it’s able to control the number of players in the market.

Perfect Market vs. Imperfect Market
Grid includes: Perfect Competition (PC), Monopolistic Competition (MC), Oligopoly (O), Monopoly (M)

One seller and many buyers.
Price setter (P > MC =
ormal {supernormal profit}).
No close substitutes (unique good).
Many barriers such as climate condition, cutthroat competition, legal barriers, existence of patent/copyright, price discrimination, capital size, high entry/exit cost.
Inefficient allocation of scarce resources – market failure (creates wastages).
Earns a supernormal profit in the SR & LR.
Demand curve slopes downwards because it can either control price or output size.
It is formed by trust, merger, cartel/agreement, trade association.
Usually uses the most modern and sophisticated machinery.
Consumer sovereignty is not respected.
Sources of monopoly – natural, historical, capital size, technological, legal.
Governments do not like monopolies, because they jeopardize the economy unless it’s controlled by the government.
Monopolies are considered market failures.
X-efficiency - a term used to describe the minimization of cost which occurs under conditions of competition. (Cost curve increases)

Price Discrimination (allows the lower income earners to consume the goods too with a lower price).
Economies of scale – gets higher discounts when buying in bulks.
Create job opportunities (contribute to economic growth).
Carry out Research & Development (normally by large companies).

Price Discrimination (causes a gap between the rich and poor).
Exploiting buyers (imposing a very high price).
Discourages new firms who try to enter the market to compete with it (cut-throat competition).
Excess capacity – not utilizing the resources well.

Price Discrimination – is the sale of a similar product at different prices to different customers in different markets.
Conditions:
- The seller must be a monopolist.
- Must have at least 2 customer groups which are separated.
- The different markets must have a different price elasticity of demand, the seller can set different pricing to both at different times.
- No resale good.

First degree – seller charging a higher price as consumers are willing to pay.
Second degree – seller gives a larger discount if a larger volume is bought and gives a smaller discount if the buyer buys a smaller quantity.
Third degree – charging different prices in different markets which can be separated either geographically or conceptually – location, age, sex, income level.

Few sellers and many buyers.
Perfect oligopoly – homogeneous good.
Imperfect oligopoly – differentiated good.
Has advertising cost.
Price setter.
Non-price competition – advertisement, sales promotion, free gifts, services rendered, packaging and etc.
Kinked demand curve - shows price rigidity.
Price leadership, price collusion, cartel.

Illustrates price rigidity in oligopolistic markets. The demand curve has two segments with different elasticities at a prevailing price point.

Features of both perfect competition & monopoly.
Many sellers and many buyers.
Differentiated product (branding, advertising, packaging, different customer group).
No barriers to entry.
Price setter.
Considered a market failure too as it practices excess capacity.
No perfect knowledge is assumed.
One producer can lower his price without affecting other firms.
Non-price competition – advertisement, sales promotion, free gifts, services rendered, packaging etc.

Describe a discriminating monopolist in your own words. Why must the elasticity of demand be different in each market segment? – because it allows the monopolist to practice different pricing strategies.
Identify the main brands available for shoes locally and consider in what ways they are differentiated from their competitors.