Markets & Prices

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  • Created by: A92
  • Created on: 10-04-13 18:32


Markets & Prices

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Market Structure in Theory:

Different market structures will have different characteristics and give rise to quite different behaviour.

There are 4 main types of market structures...

  • Perfect competition
  • Monopoly
  • Monopolistic Competition
  • Oligopoly
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Perfect Competition (most competitive market structure) -

  • Many buyers & sellers
  • Homogeneous product
  • Perfect mobility in the market
  • Firms have perfect knowledge of the industry
  • Free entry & exit barriers


- No advertising, due to homogenous products

- No product differentiation

- No long-run abnormal profits

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Monopoly (least competitive market structure) -

  • Only one supplier of the product in the market
  • No substitutes for the product
  • High barriers to entry and exit

In a pure monopoly there would be..

- No spending on advertising

- Strong market power

- Price discrimination

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Monopolistic competition -

  • Combines elements of both perfect competition and monopoly
  • Same conditions as that for perfect competition, akthough the product is no longer homogenous


- Some spending on advertising and branding

- Some spending on product differentiation

- Some small differences in price

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Oligopoly -

  • Small number of large producers
  • High barriers to entry to protect incumbents
  • High interdependence in decision making between firms
  • Non-Collusive oligopoly is when independent decisions are taken by firms, without taking into account the possible reactions of competitors
  • Collusive oligopoly is where firms work in some way to determine price and/or output-
  • Collusion can be explicit (i.e - cartels)  or implicit (i.e - price leadership)


Much non-price competition (i.e. - advertising, special offers etc)

- A tendency to price rigidity

- Abnormal profits can exist

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Barriers to entry

Below are the various barriers to entry that can exist within markets..

  • Absolute cost advantage (i.e. - exclusive access to suppliers etc)
  • Relative cost advantage (i.e. - superior management)
  • Brand Loyalty (i.e. - consumers may find switching costs high)
  • Economies of scale and scope
  • Ownership of or control over key inputs or outlets
  • Legal protection (i.e. - government controls)
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Price Discrimination:

This involves charging different prices for the same good for different reasons other than difference in the cost of supply.

There are 3 basic types of price discrimination..

  • First-degree price discrimination

Charging each consumer the max price they will be willing to pay for each individual unit consumed.

  • Second-degree price discrimination

Different prices charged for different block or portions of consumption.

  • Third-degree price disrimination

Charging different prices for the same good in different markets.

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