Market Structures:

Market Models

Kim Paulo C. Simborio | Disrell Sam Besas

The focus of this lecture is the types of market
structures. Students will learn the characteristics
of pure competition, pure monopoly,
monopolistic competition, and oligopoly.
Objectives

1. Identify various market structures and their

characteristics.
2. Be able to categorize firms into four market
structures.
3. Describe the effects of imperfect competition
upon the market and the firm.
4. Understand the pricing structure of the four
structures.
What is the primary aim/goal of business?
To maximize profits
What is competition?
: the act or process of trying to get or win
something that someone else is also trying
to get or win
Market Structure

: Amount and degree of competition among firms

competing in the same industry
: Identifies the amount of competition in an
industry
: If we can identify the amount of competition in
an industry, we’ll be able to say something about:
> Pricing
> Price competition
Market Structure

What happens in a competitive environment?

: New idea? – firm makes short term abnormal
profit
: Other firms enter the industry to take advantage
of abnormal profit
: Supply increases – price falls
: Long run – normal profit made
: Choice for consumer
: Price sufficient for normal profit to be made but
no more!
Industry

: All the sellers of the same or similar products or

services
Examples:
Automobile Industry
Shoe Industry
Showbiz Industry
Market

: an area where a product or service can be

bought or sold
: The components of a market are:
> buyers
> sellers
> products
> price
Determinants of Market Structure

: Freedom of entry and exit

: Nature of the product – homogenous
(identical), differentiated?
: Control over supply/output
: Control over price
: Barriers to entry
Types of Market Structure

1. Pure/Perfect Competition
2. Imperfect Competition
a. Monopolistic Competition
b. Pure Monopoly
c. Oligopoly
Pure/Perfect Competition

Characteristics

Many sellers: there are enough so that a single

seller’s decision has no impact on market price.
Homogenous or standardized products: each
seller’s product is identical to its competitors’.
Pure/Perfect Competition

Characteristics

Firms are price takers: individual firms must

accept the market price and can exert no
influence on price.
Free entry and exit: no significant barriers prevent
firms from entering or leaving the industry.
Pure/Perfect Competition

Examples

: Financial markets – stock exchange, currency

markets, bond markets
: Agriculture
Pure/Perfect Competition

Advantages:

: High degree of competition helps allocate

resources to most efficient use
: Price = marginal costs
: Normal profit made in the long run
: Firms operate at maximum efficiency
: Consumers benefit
Monopolistic Competition

: Monopolistic competition refers to a market

situation with a relatively large number of sellers
offering similar but not identical products.
: Meets all condition of perfect competition
except for identical products.
Product differentiation
: Monopolistic competitors use nonprice
competition
Advertising, giveaways, or other promotions
Monopolistic Competition

Characteristics
: Many buyers and sellers
: Products differentiated
: Relatively free entry and exit
: Each firm may have a tiny ‘monopoly’ because
of the differentiation of their product
: Firm has some control over price
Monopolistic Competition

Examples
: restaurants
: professions – solicitors, etc.,
: building firms – plasterers, plumbers, etc.
Pure Monopoly

: One seller of a particular product which

dominates the market with no close substitutes
and has less competition
Pure Monopoly

Characteristics

A single seller: the firm and industry are

synonymous.
Unique product: no close substitutes for the
firm’s product.
Pure Monopoly

Characteristics

The firm is the price maker: the firm has

considerable control over the price because it can
control the quantity supplied.
Entry or exit is blocked.
Pure Monopoly

Advantages
: May be appropriate if natural monopoly
: Encourages research and development
: Encourages innovation
: Development of some products not likely
without some guarantee of monopoly in
production
: Economies of scale can be gained – consumer
may benefit
Pure Monopoly

Disadvantages

: Exploitation of consumer – higher prices

: Potential for supply to be limited - less choice
: Potential for inefficiency
Pure Monopoly

Legal Types of Pure Monopoly

1. Natural Monopoly – efficient production by a

single supplier
2. Technological Monopoly – patent or copyright
to new inventions
3. Governmental Monopoly – businesses owned
and controlled by the government
Price Discrimination

Price discrimination is selling a good or service at

a number of different prices, and the price
differences is not justified by the cost differences.
In order to price discriminate, a monopoly must
be able to :
1. be able to segregate the market
2. make sure that buyers cannot resell the original
product or services.
Price Discrimination

Perfect price discrimination is a price

discrimination that extracts the entire consumer
surplus by charging the highest price that
consumer are willing to pay for each unit.
Oligopoly

: Oligopoly exits where few large firms producing

a homogeneous or differentiated product
dominate a market.
: Oligopolists act independently by lowering
prices soon after the first seller announces the
cut
: Collusion: formally agree to set prices
: Engage in price wars
Oligopoly

Characteristics

Few large firms: each must consider its rivals’

reactions in response to its decisions about
prices, output, and advertising.
Standardized or differentiated products.
Entry is hard: economies of scale, huge capital
investment may be the barriers to enter.
Oligopoly

Examples

: Supermarkets
: Banking industry
: Chemicals
: Oil
: Medicinal drugs
: Broadcasting
Duopoly

: Industry dominated by two large firms

: Possibility of price leader emerging – rival will
follow price leaders pricing decisions
: High barriers to entry
: Abnormal profits likely
Thank you for
Listening!

Kim Paulo C. Simborio | Disrell Sam Besas