Market Structure

-Market structure refers to characteristics of a market that influence the behavior of

buyers and sellers and the market outcomes they achieve in the terms of product quantity,
quality and price. It is also the organizational and other characteristics of a market such as
the degree of competition or collusion between firms. These characteris include:

● the number of firms competing to supply the market

● how much competition there is between those firms
● the ability of each firm or group of firms acting together, to determine the market price
● the ease with which new firms can enter the market to compete with existing firms..

Firms can compete with each other in a number of ways:

-Price competition involves competing to offer consumers the lowest or best possible
prices for rival products. Cutting price below that of rival products is one way a firm can try to
boost its sales and market shares at the expense of competing firms. However, the ability of
a firm to undercut rivals will be constrained by market conditions and its production costs. If
demand is price inelastic, cutting price may not boost sales and it will also reduce the profit
margin between price and average cost.

-Non-price competition involves competing on all other product features other than price. It
can involve new product development, product placements in different retail outlets and at
trade fairs, providing after-sales care and promotional campaigns including advertising,
attractive in-store displays, running competitions and issuing consumer loyalty cards. Non-
price competition is important because consumers do not just compare product prices. They
are also looking for the best value for money in terms of the quality of the good or service,
ease of purchase, levels of customer service and whether or not there is good after-sales
care should anything go wrong and they want to exchange their product.

Perfect Competition: a market structure in which numerous firms compete to supply the
market.with an identical product and have no control over the market price. Some
characteristics are:
● There are a large number of firms supplying the market
● All firms are price takers
● All firms sell the same 'homogenous' product
● New firms are able to enter the market easily
● All firms have access to the same technical knowledge and differentiate products
equipment
● Firms aim to maximize their profits by selling as much as they can at the market price
Imperfect Competition: any market structure in which firms are able to differentiate their
products from those of their rivals and therefore have some degree of control over the
market price of their products.
Contestable market:a market which has no or low barriers to entry so that new firms can
come into the market to compete existing firms.Ex: perfect competition
Cartel:Competing firms working together, often illegally, to control or fix their prices usually at
artificially high levels.
Competition Policy: laws and regulations designed to promote competition and to prevent or
reduce anti-competitive behaviors.

Why firms in a perfectly competitive market referred to as 'price takers'?

They are referred to as price takers because there are so many firms competing to supply
identical products, no one firm is able to raise its price.If a firm does increase its price its
sales will fall to zero as consumers will buy the product from other firms. This means that
they will only be able to exchange goods and services at the equilibrium market price.

Firms in a perfectly competitive market supplying an identical product have no option but to
make and sell as much output as they can at the market price. However, firms with
differentiated products and some degree of market power may be able to adopt different
pricing strategies to achieve their different objectives.

Pure Monopoly: market structure in which one firm is the sole supplier of the product.
Legal monopoly: an organization that has the exclusive legal right to provide a particular
product, for example, due to having a patent
Natural monopoly: this occurs when the most efficient number of firms supplying a market is
one.
Monopoly characteristics:
● One firm or a small number of firms acting together dominate the market
● Firm(s) are price makers, i.e. they can determine the price at which they will sell their
products
● Advertising and branding will often be used to
● There are barriers to entry to new firms
● Existing firms may be able to restrict access to new firms to technical knowledge and
equipment
● Firms are able to earn excess or abnormal profits by restricting competition and
market supply to keep prices high

X-inefficiency: this occurs when a monopoly has little incentive to control its costs because it
does not have to compete with other firms. This causes its average cost of production to be
higher than necessary
Abnormal profit: an excessive or monopoly profit above that level of profit firms would
normally earn if the market was competitive one instead

Explain potential disadvantages for consumers of a monopoly market structure.

● Less consumer choice: by restricting competition from producers and products,
there are no alternative products or services available.
● Higher prices: there is only one seller, which means that the company can set
prices as high as it wants without fear of competition.
● Since monopolies have no competitors and are able to set the market
price,consumers must either purchase the product of the pure monopoly or have to
go without

Discuss whether the price of a product supplied by a monopoly is likely to be higher or lower
than it would be if firms in a perfectly competitive market had supplied it.
To start with, in a perfectly competitive market, there are many small firms competing
against each other so the market price will be determined solely by the forces of supply and
demand. On the other hand, a monopoly is a single seller in the market, with complete
control over the supply price of the product. As it is the only supplier, it has the power to
change a higher price than in a competitive market. Whereas monopolies tend to have a
price inelastic demand since they have no competition which means they have higher prices
whereas competitions need to put lower prices to attract people to buy their products.

Discuss whether the quality of products is likely to be higher in a monopoly or in a

perfectly competitive market.
To start with, the quality of products is likely to be higher in a monopoly because they have a
wide variety of resources to use, they have a lot of capital so they are able to produce with
machines and as they have a lot of market power, they could get suppliers and some as
useful deals with them. However, the quality of products in monopolies could be lower
because as they don't have competition, they do not pay much attention or importance to the
quality since they know people will continue buying them.
On the other hand, the quality of products is likely to be higher in a perfectly competitive
market because as competition they are, they are always trying to improve its quality so as
to attract more customers.

Distinguish between 'natural' and 'artificial' barriers to entry

There are two main types of Barriers to entry. The natural barriers that occur when new firms
find it difficult to compete with larger established and often more efficient firms due to
differences in their size, costs, etc. And the Artificial barriers to entry that are those created
by larger, more powerful firms to restrict competition

Natural Barriers to entry:

Economies of scale: reduction in the long term average cost as the scale of production of a
company increases.
Capital size: The supply of a product may involve the input of such a vast amount of capital
equipment that new, smaller competing firms will find it difficult to raise enough finance to
buy or hire their own. For example, consider the amount of capital a firm would need to
produce electricity from a new nuclear power station or offshore wind farm. Only large
companies able to raise and manage a significant amount of low-cost finance will be in a
position to fund such large-scale investments.
Historical reasons: A business may have a monopoly because it was the first to enter the
market for a product and has built up an established and loyal customer base. For example,
Lloyds of London dominates the world shipping insurance market primarily because of its
established expertise dating back to the eighteenth century.
Legal considerations: The development of new production methods and products can be
expensive but can be encouraged by granting innovative producers patents or copyright to
protect them from other firms copying their ideas and quickly reducing their potential sales
and profits. In this way a government can create a legal monopoly with the sole right to
supply a new and innovative good or service.

Artificial barriers to entry:

Destruction or Predatory pricing: companies are able to lower their prices a lot even if it
means losing money in short run, so as to restrict their competition.
Restriction of supply: when a dominant firm threatens to take their custom away from their
suppliers.
Exclusive dealing: occurs when a monopoly prevents retailers from stocking the products
of competing firms
'Tying' or 'bundling': Tying' or 'bundling' arrangements are similar to exclusive deals. A
tying arrangement involves a firm agreeing to sell one product to a customer but only on the
condition that the customer also purchases one or more different (or tied) products from the
same firm even if the customer does not want the other products. The main product usually
has few or no substitutes and is therefore essential for customers to have. Tying its sale to
the purchase of other products therefore prevents customers from buying possible
alternatives from competing firms. In this way, tied arrangements restrict competition.
Copyright:

Competitive pricing strategies:

Cost-plus pricing: a pricing strategy in which the selling price is determined by adding a
mark-up for profit to the average cost of a product.(A firm wants to earn a profit margin of
20% on each item it sells.)
Price leadership/Follow-the-leader pricing:a pricing strategy in which firms competing to
supply a market avoid price competition by setting their prices at or close to those set by the
market leader
Price war: a period of fierce competition in which competing firms repeatedly try to undercut
their rivals' prices in an attempt to increase their shares of the market.
Destruction pricing: a monopoly risks losing sales and profits to new competitors seeking
to enter its market.
Penetration pricing: a firm wants to expand sales by is likely to encourage consumers in
new, growing markets overseas to buy its product.
Price collusion: an agreement between competing firms to control market supply and price

TYPES OF ECONOMIES OF SCALE

Technical economies: They refer to production methods.

Large firms can:
⇒ afford expensive machinery that can boost output and increase speed of production. There
are some machines that are meant to produce huge amounts (Economy of increased
dimensions)
⇒ apply division of labour
⇒ have their own labs that can investigate and discover new production methods and
develop new products. Large firms are in this way likely to innovate (R + D/ Research
and Development)

Financial economies: They refer to the way in which companies raise money.
Large firms can:
⇒ easily get bank loans because they are well-known. Such loans will be provided with low
interests as large businesses are considered trustworthy borrowers and can
provide collateral for their loans.
 ⇒ have access to an additional source of finance which is not available for small firms; i.e.
issue of shares. Money raised from shares does not have to be paid back and no interest rates
are charged.

Marketing economies: They refer to the way in which companies advertise their products.
Large firms can:
⇒ afford expensive advertising on TV and other media. In this way advertising costs will be
high but as they are spread over a large amount of units the advertising cost per unit is low.
⇒ have their own vehicles to carry supplies and deliver products. This means no
transport has to be paid to other companies while at the same time the lorries/trucks
can display the name of the brand and therefore advertise the product. The same
applies for companies making their own bags and having own stores.
⇒ Big businesses, as they produce a lot, need plenty of raw materials. This means they buy in
bulk and get discounts. They obtain cheaper supplies. This is known as
purchasing economies.

Managerial economies: They refer to the way in which companies are organised.
Large firms can:
⇒ Be divided into departments (Financial Department, Production Department, Human
Resources Department, Marketing Department and the like). Specialised workers and
managers can be employed in each sector, thus applying division of labour at a managerial
level. Having skilled people means lower chances of mistakes; therefore a reduction in costs.

Risk-bearing economies (Diversification): large firms reduce costs and chances of failure
by spreading risks.
Large firms can:
⇒ Have different products, so if there is a problem with one (for example a decrease in
demand) they have other products to ‘weather the storm´. This is called a wide
product portfolio.
⇒ Have different retail outlets. This means reaching the customer in several ways.

⇒ Have different suppliers, thus reducing risks if one has a problem and meaning that
suppliers sometimes compete among each other to be able to sell to the large firms and
therefore reduce prices of raw materials.