23. Market Structure

Introduction to Market Structure

• Definition: Market structure refers to how industries are classified based on the level of competition and characteristics of businesses operating within them.
• It determines how prices are set, how goods are sold, and how companies behave.
• The structure of a market influences both consumer choices and business strategies.

Perfect Competition

Perfect competition is an ideal market structure where competition is at its highest possible level.

Key Characteristics:

1. Many Buyers and Sellers

• • No individual buyer or seller can influence the market price.
  • Buyers have access to several sellers, and sellers can sell their goods to many buyers.
  • Ensures fairness and price stability in the market.

2. Standardized Products

• All firms sell identical or homogenous products.
• Examples: wheat, eggs, milk, notebook paper.
• Consumers make choices solely based on price since there’s no product differentiation.

3. Freedom to Enter and Exit the Market

• No major barriers (like government restrictions or high startup costs).
• Firms can easily start or stop production based on profitability.
• Promotes dynamic efficiency and market flexibility.

4. Independent Buyers and Sellers

• No collaboration or collusion to fix prices or manipulate the market.
• Each entity acts independently based on their own profit or utility goals.
• Equilibrium price is determined by supply and demand forces.

5. Well-Informed Buyers and Sellers

• Both parties have complete knowledge of product pricing and quality.
• Transparency ensures efficient decision-making.
• Sellers know their competition; buyers know where to get the best price.

Additional Concept:

• Price Taker: Firms in perfect competition must accept the market price and cannot influence it.

Types of Profit in Economics

1. Normal Profit:

• • Occurs when Total Revenue = Total Cost (including explicit + implicit costs).
  • Considered the minimum profit an entrepreneur must earn to stay in business.
  • Also known as zero economic profit.

2. Abnormal (Supernormal) Profit:

• Earned when Total Revenue exceeds Total Cost.
• Attracts new firms to enter the market in the long run (if possible).
• Indicates higher-than-average success.

Monopoly

A monopoly is a market structure characterized by the absence of competition.

Key Characteristics:

1. Single Seller:

• • One firm controls the entire supply of a good or service.
  • No close substitutes for the product exist.
  • Example: De Beers controlled the diamond industry in the 20th century.

2. High Barriers to Entry:

• New firms find it difficult or impossible to enter the market.
• Reasons include government regulations, ownership of resources, large startup costs, or patents.
• Example: De Beers worked with governments to restrict competitor access.

3. Price Makers:

• Monopolists can set prices since they have no direct competition.
• They may restrict supply to keep prices high.

4. Unique Product:

• Often the monopoly arises because the product is innovative, patented, or geographically unique.

5. Imperfect Information:

• Unlike perfect competition, buyers and sellers may lack full information.
• Makes comparison difficult and can distort pricing and efficiency.

Types of Monopolies

1. Natural Monopoly:

• • A single firm can supply the entire market more efficiently than multiple firms.
  • Example: Public utilities like water or electricity.
  • Benefits from economies of scale.

2. Government Monopoly:

• Owned or regulated by the government.
• Usually created when private companies find the service unprofitable.
• Example: Postal service.

3. Technological Monopoly:

• Based on patents or proprietary technology.
• Gives the firm exclusive rights to sell a product for a period.
• Example: Polaroid held patents that kept Kodak out of the instant photography market.

4. Geographic Monopoly:

• Arises due to physical location or isolation.
• Example: A sports team tied to a specific city; no similar competition in the region.

Profit Maximization in Monopoly

• A monopoly can increase profit by reducing supply, which raises prices (due to a downward-sloping demand curve).
• Example: A drug manufacturer makes large profits during the patent period (e.g., Claritin by Schering-Plough) and loses profit after the patent ends.

Why Do Monopolies Arise?

1. Cost Efficiency:

• Some firms outcompete others by cutting costs and offering better products, eventually dominating the market.

2. Mergers and Takeovers:

• Merging with or acquiring competitors can reduce the number of firms to one.

3. Legal Advantages:

• Government may grant monopoly rights or legal protection.

4. Control Over Resources:

• Firm may own all access to a critical input (like owning all the gold mines in a country).

 Why Do Monopolies Persist?

1. Economies of Scale:

• Larger firms can produce at a lower cost, making it harder for new firms to compete.

2. Capital Intensity:

• High startup costs prevent new entrants.

3. Brand Loyalty:

• Strong branding can discourage consumers from switching even if competitors appear.

4. Exclusive Access:

• Monopoly may have preferential access to raw materials or sales channels.

5. Barriers to Exit:

• Long-term contracts or sunk costs (non-recoverable expenses) may discourage new firms.

Evaluating Monopolies: Good or Bad?

Criticisms:

• Can lead to inefficiency, higher prices, and lower quality.
• Lack of pressure may cause monopolies to ignore consumer preferences and stop innovating.
• Consumers have no alternative choices.

Potential Benefits:

• Lower costs due to large-scale production.
• Avoid duplication of infrastructure (e.g., multiple train lines).
• Can invest heavily in R&D and innovation.
• May result in better products over time.