Market Structures

Types of market structure:

IMPERFECT COMPETITION – MONOPOLISTIC COMPETITION.

There are two forms of imperfect competition, one of them being monopolistic competition. Monopolistic competition is a market structure in which there are lots of firms who operate independent of each other but each firm has some market power so they are able to have differentiated products. An example being your local high street, where you have a pizza place, a Chinese restaurant, an Indian restaurant, a fish and chips shop etc. all competing for the same customers. These firms compete on quality, price and marketing. This market structure has low entry barriers, so firms can enter and leave whenever they choose to. In the short run, firms in the monopolistic competition market structure make abnormal profit, but in the long run due to low entry barriers they make only normal profit as people spot the abnormal profit and enter the market. Firms are price makers as they have unique products they can charge a higher or lower price than their rivals. Firms place a high importance on advertising to gain customers from their competitors so consumers can often receive very good advertising offers from firms. For example, with a local restaurant, they might offer free delivery as it saves consumers time from driving to pick up their food, or buy one get one free etc. Another advantage is that because they are all unique, they offer choice to consumers.

IMPERFECT COMPETITION – OLIGOPOLY.

Oligopoly is the second form of imperfect competition. Oligopoly is a market structure in which there is a small amount of large firms, for example the supermarket industry (Asda, Sainsbury’s, Tesco, Waitrose) or the energy industry (British Gas, EON Energy, EDF Energy, SSE). Oligopoly is a good market structure, as in an oligopoly; there is game theory, also represented graphically as the kinked demand theory. This means firms are competing against their competitors for customers. If one firm raised their prices, their competitors would keep the low price and steal market share, on the other hand, if they lowered prices, the other firms would follow suit and lower their prices as well to keep their share of the market. Firms in the oligopoly market structure know they are interdependent on one another, and any choices one firm makes has consequences for their competitors. This is good for the consumer as they can benefit from low prices for different goods at different times. On the other hand, in the oligopoly market structure, firms are able to collude, this means that they can work together illegally to fix prices; they in essence become a monopoly and therefore price makers, this is known as a ‘cartel’. One example being Asda and Sainsbury’s fixing the price of milk in 2001/02 so they made more abnormal profit, and we saw a decrease in consumer surplus.

PERFECT COMPETITION.

Perfect competition is a market structure in which there is a large number of small firms who produce identical goods otherwise known as homogenous goods, for example, milk or wheat etc. products, which do not have branding. This market structure has a lot of buyers, as all the goods produced are necessities. Firms in this market structure produce at marginal revenue = marginal cost = demand, thus in the long run making only normal profit. In this market structure, there is no leading firm, all the firms are price takers, and if any firm increases the price of their good, they will get wiped out from the industry simply because every other firm will keep the old cheaper price. If one firm doubles its output, there will be barely any change in the industry output. Buyers in this market structure have perfect knowledge about the products. This market structure has low entry barriers, which means that in times of economic profit, new firms enter the market bringing prices back down again. And in times of economic loss, firms can simply leave the market. This market structure is good as it maintains low prices for the consumers but rarely exists, as the characteristics of the market are strict, the closest we can get to it in reality is the agricultural industry.

MONOPOLY – LEGAL.

A monopoly is a market structure in which there is only one firm in the industry. There are several types of monopoly which will be looked at. The first being legal monopoly, a legal monopoly is defined as a firm, which has 25% or more market share (UK law), however when firms have more than 25% market share, the government intervene to regulate the market, for example Lloyds and TSB demerged, or when Tesco became too big and had to sell off stores to reduce their market share because they had too much control of the market.

MONOPOLY – NATURAL.

An example of a natural monopoly is Thames Water, who provide the water supply to everyone in London. There is only one firm in the industry because there are very high entry barriers and very high fixed costs, therefore it is in the best interests of the consumer to only have one firm as it is more efficient in the long run as it has the lowest average cost as it is able to fully penetrate the market and the full benefits of economies of scale, thus in the long run it means consumers can have lower prices compared to if there were many firms in the industry as they’d have higher average costs and would mean higher prices for consumers. However, because they are a monopoly, they are price makers and therefore have the ability to make abnormal profits.

MONOPOLY – GEOGRAPHICAL.

Geographical monopoly exists when there is only one firm in that region and they have no competitors. For example, in a small town they may only have one petrol station, thus that petrol station is geographical monopoly, however in other parts of the country there may be lots of petrol stations and therefore a competitive industry.

MONOPOLY – TECHNOLOGICAL.

A technological monopoly exists if a business is the first to produce a good or service that they are able to copyright or patent, thus stopping others from offering that same product without breaking the copyright. Or they are able to produce a knock off version that doesn’t have the same quality as the original protected version. Examples of industries in which technological monopolies can exist are pharmaceuticals and electronic goods.