Markets & Prices
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
- Monopolistic Competition
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
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
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
- 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
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)
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.