Market structure

Chapter 7

Course outline

demand Basic Model Cost/Market structure Managerial perspective Organization of firm

Managerial Microeconomics markets

Marginal analysis
Strategic analysis

Additional topics

Applying economics Methodology Matching thoery

Lecture Outline

1.
2. 3.

Market structure
Definition MES and market structure Measure market concentration

1. Market structure

What is market structure? Industry structure: some measure of the way in which the production of output in the industry is allocated across firms. Market structure: factors including industry structure (number of firms, size of firms), technological and cost conditions, demand conditions, entry and exist conditions.
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2. Market structure

What are the major factors determining market structure?

2. LRAC Curves

Long Run Average Cost curves and market structure:

$

c Q*

Q
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2. Minimum Efficient Scale

Minimum efficient scale: output level at which long-run average costs are minimized. MES is at the minimum point on a U-shaped LRAC curve and at the corner of an L-shaped LRAC curve.

2. MES and market structure

If MES is relatively large in comparison with the market demand:

D

The market is most efficiently served by a single firm---natural monopoly!

LRAC

Q
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2. MES and market structure

If MES is relatively small in comparison with market demand:

Many small firms in the market.

Q
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3. Measure of market concentration

Four-Firm Concentration Ratio

The sum of the market shares of the top four firms in the defined market The sum of the squared market shares of the top 50 firms in the defined market, multiplied by 10,000.

Herfindahl-Hirschman Index (HHI)

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3.1 The Four Firm Concentration Ratio

Measures the percentage of the value of sales accounted for by the four largest firms Range from 0 percent to 100 percent

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3.2 Herfindahl-Hirschman Index (HHI)

The square of the percentage market share of each firm summed over the largest 50 firms (or the number of firms if there are less than 50) Range from approximately 0.5 to 10,000.

In perfect competition the HHI is small.

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3.1 Calculate C4
Tiremakers
Sales Firm
(millions of dollars)

Top, Inc. ABC, Inc. Big, Inc. XYZ, Inc. Top 4 sales Other 10 firms sales Industry sales Four-firm concentration ratios:

200 250 150 100 700 175 875

Tiremakers: 700/875 100% = 80%

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3.2 Calculate HHI

Suppose an industry consists of 3 firms. One has sales of $30 million. The other two have sales of $10 million each.

HHI=[(30/50)2 +(10/50)2 +(10/50)2]*10000=4,400

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3. Four-Firm concentration ratio and HHI in US (1997/2002)

Industry Breakfast cereals Electronic computers Games and toys Mens and boys clothing C4 83/82 45/81 43/39 42/50 HHI 2446/3000 728/2662 564/494 846/1020

Motor vehicles
Ready-mixed concrete Semiconductors

82/85
7/11 34/48

2,506/N/A
29/57 414/908

Soap and detergent

Soft drinks Tires Womens and girls clothing

65/63
47/46 73/73 14/14

1,618/2308
800/710 1,814/1645 111/87
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Market Structure
Perfect
Characteristics competition

Monopolistic
competition Oligopoly Monopoly

Number of firms in industry

Many

Many

Few

One

Product
Barriers to entry

Identical

Differentiated Either identical or differentiated

None Moderate

No close substitute
High

None

Firms control over price

None

Some
Low 101 to 999

Considerable
High More than 1,000

Considerable or regulated
100 10,000 Local phone s service, electric 16 & gas utilities

Concentration ratio 0 HHI Examples Less than 100 Wheat, corn

Food, clothing Automobiles, cereals

Topic Intended Learning Outcomes

Students should be able to

5.1 Define minimum efficient scale and use it to explain market structure. 5.2 Calculate four firm concentration ratio and HHI.

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