Market Structure: Fundamentals

Market Structure: Fundamentals

1. The term market structure refers to the different forms or features that may affect the behaviour and performance of the firms in a market.

2. Features:

   • Number of sellers
     • Many sellers
       • Each firm only has a small market share and have negligible impact on market supply when output changes. Too small to reap IEOS
     • Few Sellers
       • Each firm has a large market share, and changes in output have a significant effect on market supply. The few sellers keep track of each other's actions. Large enough to reap IEOS.
   • Nature of products
     • Homogeneous
       • Product sold is identical/same with many perfect substitutes. Buyers are therefore indifferent of firm selling the product.
     • Differentiated
       • Products sold are not perfect substitutes. Product differentiation distinguishes a product making it more attractive in a particular market.
   • Barriers to entry
     • Obstacles preventing new competitors from competing on an equal basis with established firms in the industry
     • Natural
       • Incumbent Firm Experiencing EOS.
       • High Sunk Costs
       • Natural Monopoly: Small Market Size.
       • High Fixed Costs
     • Artificial
       • Exclusive Ownership or Control of Specific Factors i.e.. Raw materials, unique machinery.
       • Exclusive Legal Rights. i.e. Patents, Copyrights, Government Franchises and Licenses
       • Predatory Pricing (Pricing products low enough to end a competitive threat.)
     • Others
       • Establishing of brand.
       • Cartel. (Agreement amongst existing suppliers to keep out competitors.)

3. Types of market.

   • Perfect competition
   • Monopolistic competition
   • Oligopoly
   • Monopoly.

4. Competition in a Market

   • Price
     • Competition based on prices of product offered for sale to maintain market share & discourage potential firms from entering the market (Large Firms) and affect total revenue due to presence of similar products with low differentiation and thus sell more. Existing firms employ predatory pricing.
   • Non-price
     • Product development
       • Aims to produce goods different from rivals' products. Thus increasing demand and decreasing price elasticity
     • Product promotion
       • Product is not modified but main purpose is to increase consumers' willingness to purchase. Informative VS Persuasive advertising.
         • (+) Helps consumers make better decisions. (+) Promotes competition. (+) Advertising as industry generating large revenues. (+) Keeps prices down for media products and services.
         • (-) Advertisements are misleading, as the purpose is to compete/persuade. (-) Successful advertising leading to growth of firms to the point of monopoly subsequently act as financial BOE. (-) Competitive advertising becomes self-cancelling. (-) Higher price of advertising passed on to consumers.

5. Market Structure

   • Firms make up the industry (market). Characteristics of market affects behaviour of firms.
   • Time Period affects behaviour of firms due to existence of fixed factors in SR and non-existence of died factors in LR.
   • Players and their interest.
     • Consumers: Prices, quality of goods, variety of goods, obtaining maximum consumer surplus.
     • Producers: Profits, and low COP.
     • Society: Allocative efficiency, reduction in wastage of resources
     • Government: watchdog looking into interest of the society. They intervene the market as long as interest of other players are at stake.

6. Identifying.

   • Concentration ratio
     • Percentage of total sales/output accounted for by the ;largest 3, 5 or 8 firms in the industry. Studying the concentration ratio, economists can estimate the market power of firms in industries.
     • Drawbacks: Does not account imports, does not account for number of firms in the industry.