Markets & Prices

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
• Monopoly
• Monopolistic Competition
• Oligopoly

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

Implications..

- 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

Implications..

- Some spending on advertising and branding

- Some spending on product differentiation

- Some small differences in price

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)

Implications.. 

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

- A tendency to price rigidity

- Abnormal profits can exist

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)

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.