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.)

4. No barriers to entry or exit.

5. 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.)

4. Strong barriers to entry.

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

5. 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.)

4. Small barriers to entry.

5. 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.)

4. Strong barriers to entry.

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

5. 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