WP

Market structures

Market Structures

Page 1

  • Overview of market structures.

Page 2: Market Failure

  • Definition: Resources are not allocated efficiently.

    • Result: Social surplus is not maximized.

Page 3: Market Power (Monopoly Power)

  • Definition: The ability of a firm to control the price of its product.

    • Implication: Can raise the price above marginal cost.

Page 4: Market Competition Structures

  • Types of market structures:

    • Perfect Competition

    • Monopolistic Competition

    • Monopoly

    • Oligopoly

Page 5: Perfect Competition Characteristics

  1. Large number of small companies.

  2. Companies are price takers.

    • No influence on product pricing.

  3. Homogeneous products.

    • Products are identical regardless of the producer.

Page 6: Perfect Competition Characteristics (cont.)

  1. No barriers to entry or exit.

  2. Perfect information for consumers and producers.

    • No asymmetric information.

Page 7: Monopoly Characteristics

  1. Single company in the market.

  2. Monopolist sets the product price.

    • Holds monopoly power.

  3. Unique product with no close substitutes.

Page 8: Monopoly Characteristics (cont.)

  1. Strong barriers to entry.

    • Barriers can be legal, economic, technological, or informal.

  2. Advertising to maintain product awareness.

Page 9: Monopolistic Competition Characteristics

  1. Relatively large number of small companies.

  2. Companies can set prices to some extent.

    • Limited monopoly power.

  3. Differentiated products.

    • Consumers can distinguish between products.

Page 10: Monopolistic Competition Characteristics (cont.)

  1. Small barriers to entry.

  2. Competition based on:

    • Price (to some extent)

    • Quality

    • Advertising (crucial)

Page 11: Oligopoly Characteristics

  1. Small number of companies.

    • Interdependence among firms.

  2. Companies can set prices, but avoid price competition.

    • Price wars are typically avoided.

  3. Products can be identical or differentiated.

Page 12: Oligopoly Characteristics (cont.)

  1. Strong barriers to entry.

    • Barriers can be legal, economic, technological, or informal.

  2. Non-price competition:

    • Focus on quality and advertising.

Page 13: Market Share

  • Definition: Percentage of total sales in an industry earned by a specific company over a specified time period.

Page 14: Concentration Ratio (CR)

  • CR1 > 90%: Effective monopoly.

  • CR4 60%: Tight oligopoly.

  • 40% < CR4 < 60%: Loose oligopoly.

  • CR4 ≤ 40%: Effectively competitive market.

Page 15: Herfindahl-Hirschman Index (HHI)

  • Definition: Sum of the squares of each company's market share.

Page 16: HHI Advantages

  1. Reflects market share distribution among companies.

  2. Greater inequality in market share increases HHI (due to squaring).

  3. More companies lead to a lower HHI, ceteris paribus.

Page 17: HHI Values

  1. HHI < 1500: Unconcentrated market.

  2. 1500 < HHI < 2500: Moderately concentrated market.

  3. HHI > 2500