Market Models /Structures*
*
are theoretical frameworks for existing firms and industries in the real world.
Basic market models:
1. Pure/ perfect competition- a market
situation where there is a large number of
independent sellers offering identical products.
Characteristics of pure competition:
1. large number of independent sellers.
2. products are identical or homogeneous (the
same).
examples: farm products like rice,
vegetables, fruits, etc. ..
3. No single Seller and BUYER can influence the
change in market price of a product.
- The rise or fall of market price is due to
changes in total demand or total supply.
4. It is easy for new firms or sellers to enter the
market and for existing firms or sellers to leave
the market. NO significant barriers to entry….
5. no non- price competition like advertising, sales
promotion, or packaging…
2. Pure Monopoly- refers to a market situation
where there is only ONE seller or producer supplying
unique goods and services.
Characteristics of Pure Monopoly:
1. There is only ONE producer or seller.
no
2. Products are unique in the sense that there are
good
or
close
substitutes.
3. The monopolist dictates the price (‘price
maker’). Since he is the only supplier he can reduce his
output in order to increase his price. Or he can increase
his supply if this means an increase in his total profit.
4. It is extremely difficult for new firms to enter
the
market.
There are formidable barriers like the very
big capital…..The monopolist is an established giant….
5. There may be or no extensive advertising or
sales promotion on the goods or services..or maybe only
for
public
relations..improving
public
image…
Ex.?
3. Monopolistic competition
- pertains to a market situation where
there is a relatively large number of SMALL
producers or suppliers selling similar but not
identical products.
Characteristics of Monopolistic competition:
1. There is a large number of sellers acting
independently (about 100 sellers/ firms more or less)
2. Products are differentiated. This means physical
differences as well as variations in location of the store,
services of the sales staff, packaging…etc.
3. There is limited control of price. It is possible for
some sellers to slightly reduce or increase their prices
because of the differences of their products…..
4. Entry of new firms in the market is relatively
easy. Compared to Pure Competition, it is difficult for firms
to put up their business…..because of competition..requires
effective sales promotion…..bigger capital..
`
5. There is aggressive non- price competition in
product quality, services, locations….etc..extensive
advertising…
Example?
4. Oligopoly- is associated with a market
situation where there are few firms offering
standardized or differentiated goods and services.
Includes a wider range of market structures than
the other three markets models…
Characteristics of Oligopoly:
1. There are very few firms which dominate the market.
Each firm produces a big portion of the total industry
output.
2. Products are identical or differentiated.
Steel, zinc, lead, cement and other industrial raw
materials are identical products.
Finished goods like cars, airplanes, laptops are
differentiated products.
3. There is a price agreement among the producers to
promote their own economic interests. The biggest
among the producers is the price leader.
ex. OPEC (Organization of petroleum exporting
countries)
4. The entry of new competitors in the market is difficult.
It requires enormous capital and large scale production. It
is very difficult for new firms to compete with existing firms
because these are already well- established.
5. There is a strong advertising among those who produce
differentiated products like cars, cigarettes, appliances. In
case of identical products advertising is only for image
building……..
Market Structures
Perfect
Competition--many
standardized product
Monopolistic Competition--many
differentiated product,
sellers
sellers
of
of
a
a
Oligopoly--few sellers of a standardized or a
differentiated product
Monopoly--a single seller of a product for which
there is no close substitute
Pure/ Perfect Competition: Monopolistic Competition
-Many buyers and
-Free entry and exit to
sellers
industry
-Products
-Homogenous product
differentiated
–
identical
so
no
-Relatively free entry
consumer preference
and exit
-Large
number
of
-Each firm may have a
buyers and sellers
tiny ‘monopoly’ because
of the differentiation
– no individual seller can
of their product
influence price
-Firm has some control
-Sellers
are
price
over price
takers
– have to accept the
market price
-Perfect
information
available to buyers and
sellers
Oligopoly – Competition Pure Monopoly:
amongst the few
-industry is
-Industry
dominated by small the firm!
-High barriers to
number of large
firms
entry
-Many firms may
-Firm controls
make up the
price OR
industry
output/supply
-High barriers to
entry
-Abnormal profits
-Products could be
in long run
highly
-Possibility of
differentiated
price discrimination
– branding or
homogenous
-Consumer choice
-Non–price
limited
competition
-Potential for
collusion?
-Abnormal profits
-High degree of
interdependence
between firms
TYPE
Selllers
Product
Pure
competition
many
Homogenous free
Rice/ corn
trading
Monopoly
One
One
Meralco
Oligopoly
Few
Differentiat restricted
ed
OIL
differentiat Relatively
ed
free
Travel
agency
Monopolistic many
competition
Entry
NO
Example
In economics, markets are classified according to the structure of the
industry serving the market.
Industry structure is categorized on the basis of market structure
variables which are believed to determine the extent and
characteristics of competition.
Those variables which have received the most attention are number of
buyers and sellers, extent of product substitutability, costs, ease of
entry and exit, and the extent of mutual interdependence [Baumol,
1982; Colton, 1993].
In the traditional framework, these structural variables are distilled
into the following taxonomy of market structures:
(1) Perfect Competition--many sellers of a standardized product,
(2) Monopolistic Competition--many sellers of a differentiated
product,
(3) Oligopoly--few sellers of a standardized or a differentiated
product, and
(4) Monopoly--a single seller of a product for which there is no close
substitute.
Determinants of Market Structure
1. Government Laws and Policies.
- in some industries, the government controls the
degree of competition in the interest of the
economy and the consumers....to prevent abuses
of monopolistic firms.
2. Technology.
- because of technology good or better
substitutes have been developed...thus monopoly
has been transformed into oligopoly....
- the discovery of better technology by some
firms has driven away less efficient competitors...
3. Business policies and practices.
- the presence of giant firms discourage the entry
of new firms with little resources....big firms
attempt to eliminate/ reduce competition.
4. Economic Freedom.
- economic freedom associated with freeenterprise economy have somehow changed market
structures....it haw become survival of the fittest..