Market Structures

Structure -> Conduct -> Performance

Structure
Condition
s

Perfect Competition
1. Many buyers and
sellers
2. Homogenous product
3. Freedom of entry and
exit
4. Perfect Knowledge

Price

Price Taker market

determines the price

Methods
of
Competiti
on
Short Run

Price

SNP

Monopolistic Competition
1. Many buyers and
sellers
2. Product Differentiation
3. Freedom of Entry and
Exit
4. Semi-perfect
knowledge
Little bit of Control price
takers within brackets

Oligopoly
1. Few suppliers
2. Pure-Homogenous
Impure-Differentiated
3. Barriers to Entry
4. Interdependence of
Firms

Monopoly
1. Only 1 Supplier
2. Differentiated or
Homogenous
3. High Barriers to Entry
4. Imperfect Knowledge

Fair Degree of Control

interdependent

Price Competition
Non-Price: product
differentiation, advertising,
product development
SNP

Non Price: advertisement,

product differentiation,
bundling
COLLUSION
Kinked Demand Curve

Price Maker but still

constrained by the Dcurve
No Competition

Game Theory
Prisoners Dilemma;

SNP Same as Long Run

NP
NP

Loss
Loss

alternative strategies
depending on assumptions
about rivals behaviour.
Maximin/maximax
Collusion
Agree on price
Market share
physically divide up the
market
Marketing Strategies
level of advertising, diff
audiences
Formal Collusion is known
as cartels e.g. OPEC. High
barriers to entry are
essential to ensure the
continuation of OPEC.
Tacit Collusion
Dominant firm price
leadership
Barometric firm price
leadership

Long Run

SNP will attract more firms

SNP will attract more firms

Average Cost Pricing

profit over AC for range of
output, flat-bottomed AC
curve.
Price stickiness, kinked

Long run situation is

Equilibriu
m

Long Run
Industry

to the industry, so market

supply will increase,
bringing market price
down. This will persist until
firms only makes NP

to the industry, so market

supply will increase,
bringing market price
down. This will persist until
firms only makes NP

Losses will encourage

firms to leave the industry,
so market supply will fall,
bringing the market price
up, this will persist until
firm only makes NP.
Long Run Equilibrium is
NP
Falling Cost Industry
external economies of
scale, so LR supply curve
slopes downwards

Losses will encourage

firms to leave the industry,
so market supply will fall,
bringing the market price
up, this will persist until
firm only makes NP.
Long Run Equilibrium is
NP
Firms only make NP, no
wastage

Constant cost industry

where there are no
external econs or disecons
of scale, so LR supply
curve is horizontal

Evaluatio

Rising cost industry, where

there are external
diseconomies of scale, so
LR supply curve is rising.
Allocatively and

Firms have spare capacity,

AR slopes downwards so
firms will always produce
below the Technical
Optimum. Spare Capac to
deal with increase in
demand

demand curve shows why

prices do not alter even if
costs shift considerably.
Level of advertising and
range of goods produced
act as a barrier to entry.

Inflationary situation, firms

will raise prices and a new
kinked demand curve will
emerge could happen
with one firm first or
many.

exactly the same as short

run situation if the BTEs
hold up.
1. Economies of Scale
natural monopoly and
permanent way
2. Brand loyalty
3. Network Effect
4. Lower costs for
established firms
5. Legal protection
Patents
6. Predatory pricing
7. Ownership/control of
key factors
8. Advertising and
product development
spend excessively on
advertising and offer a
wide range of products
in order to discourage
new competitors.

Firms do not operate at

lowest possible cost,
P>MC

P>MC so there is

Oligopolies enjoy full

Enjoys full economies

n
Efficiency

Examples

productively efficient
NP no waste from
societys POV
Market is competitive,
every firm must be
technically efficient
Responds readily to
changes in consumer
demand
No need to waste
money on advertising
(homog. product)
Incentive to be
innovative for
additional profit in the
SR
BUT
No product
differentiation
No funds for R&D if
only NP
Internal econs of scale
means that PC will not
arise.

allocative inefficiency
Not productively
inefficient since they
operate to the left of
the Technical Optimum
HOWEVER
Higher price is the
price to pay for
diversity,
heterogeneous
products mean that
markets approximate
to PC if consumers are
not bothered by
diversity and to
MonComp when they
do so its different not
better
Dynamic market
structure, continually
innovate for SNP in SR.
Is it like a congregation
of mini monopolies?

benefit of internal
economies of scale
Funds for R&D from
SNP, rapid
development of
products
Product development
huge variety
HOWEVER
Wasteful spending on
advertising
There is potential for
collusion and hence
exploitation of
consumer surplus; acts
like a monopoly
Problems with oligopoly
are reduced if barriers are
low, it becomes a
contestable market and
helps keep prices in check

of scale
Funds for R&D
No need for wasteful
advertising
HOWEVER
Allocatively inefficient
since P>MC
Output is lower and
market price is higher
than it would have
been under PC
X-inefficiency
(Leibenstein)
Costs of acquiring or
protecting monopoly
position Directly
Unproductive
Profitseeking (DUP)
Inequality
Potential Competition
Contestable Market
Legislation against
monopoly

Appendix: Monopoly
Trust busting good aspects are lost as well as the bad
1. Public ownership (nationalization): government takes over the
running of the monopoly, decides output and prices. However- this
solution doesnt have any competition and hence inefficiency can
arise
2. Public regulation, separates role of producer and supervisor, allow
efficiency of profit motive but prevents exploitation. BUT regulatory
capture.