Market Structure and Competition

Market Structures
• Type of market structure influences how a firm behaves:
–Pricing
–Supply
–Barriers to Entry
–Efficiency
–Competition

Degree of competition in the industry
• High levels of competition-- Perfect Competition
• Limited Competition-- Monopoly
• Degrees of competition in between

Determinants of market structure
– Freedom of entry and exit
–Nature of the product-- homogenous (identical), differentiated?
–Control over supply/output
–Control over price
–Barriers to entry

Perfect Competition:
– Free entry and exit to industry
– Homogenous product-- identical, so no consumer preference
– Large number of buyers and sellers-- no individual seller can influence price
– Sellers are price takers-- have to accept the market price
– Perfect information available to buyers and sellers

Examples of perfect competition:
–Financial markets-- stock exchange, currency markets, bond markets?
–Agriculture?
• To what extent?


Advantages of Perfect Competition:
• High degree of competition helps allocate resources to most efficient use
• Price = Marginal Costs
• Normal profit made in the long run
• Firms operate at maximum efficiency
• Consumers benefit

What happens in a competitive environment?
– New idea?-- firm makes short-term abnormal profit
– Other firms enter the industry to take advantage of abnormal profit
– Supply increases, price falls
– Long run-- normal profit made
– Choice for consumer
– Price sufficient for normal profit to be made but no more