Market Structures

Natural Monopoly

A monopoly created and sustained by economies of scale

Perfectly Competitive Industry

Firms are price takers Consumers can only be perfectly competitive only if consumers regard the product from all firms equivalent.

Market Structure is based on 2 Dimensions

The number of firms in the market Whether goods offered are identical or differential

4 Types of Barriers to Entry

Monopoly Control of a scarce resource or input Economies of scale Technological superiority Government-created barrier

Imperfect Competition

This creates a situation in which firms compete but also possess market power

Economies of Scale

Advantage for larger firms; as output grows, cost decreases For markets with high cost, it is better to produce in high cost so firms can lower the ATC Newcomer firms have a hard time to enter

Price in Competitive Market

As low as it can be Everything is identical - need to have lower price Both firms and consumers are Price - takers Free Entry & Exit

Monopolies if the were were no laws?

Barriers to entry prevents firms to enter the market Hard for other firms to enter the certain market

standardized products or commodities

products consumers regard as the same good even if they come from different firms Necessary to be a competitive production

Technological Superiority

Typically not a barrier to entry over the long term

Interpret HHI

Bunch of small # squared < few big # squared More firms there are, smaller the HHI is If we just add, the whole percentage will be almost 100 for all types of firm

How do we measure market power

Concentration ratio herfindahl-hirschman index (HHI)

Characteristic of Monopolistic

Each producer has some ability to set price of his/her differentiated product; they can raise their price because firms can differentiate their product Free entry and exit in long term Prices tend to be lower

Oligarchy

Few firms - more than one but not a large number - sell products that may be either identical or differentiated Few companies that dominate the market ex) Coke, Cell phone carrier, tablets, high-tech

Market Power

Firms have some choice over price Their decisions about how much to produce affect the market price

Price Taker Firms

Firms need to be numerous and relatively small

Market Share

For market to be competitive, no one firm should have a large market share fraction of the total industry output accounted for by that firm's output.

Differential Goods

Goods that are different but considered at least somewhat substitutable for consumers When consumers think the product is special, sellers can have a differentiated product

Control of a scarce resource or input

If one firm has control over a resource or input crucial to an industry, it can prevent other firms from entering its market.

Free Entry and Exit

In Competitive Market, in theory, it should be easy to enter and exit the market

Monopolistic Competition

Many firms each sell a differentiated product (for example, producers of economics textbooks) Between oligarchy and Perfect competition ex) Make up, potato chips, Free entry and exit in long term

Perfect Competition

Many firms each sell identical products Many sellers selling one same product ex) closest perfect competition is agricultural products

4 Primary Models of Market Structure

Monopoly Oligarchy Monopolistic Competition Perfect Competition

Oligopoly

Oligopoly have some market power Prices are little high

Government Created Barriers

Patents and Copyrights Reserved right for certain amount of time Promote creativity/ provide incentive

Price Taker

Perfect Competition; firms and consumers' actions cannot affect the market price of the good or service it sells. neither consumption decisions by individual consumers nor production decisions by individual producers affect the market price of the good.

Monopoly

Single fiems sells single product ex) Duke Energy in South East (geographically limited), electricity, water Government regulates the price

Concentration Ratio

measure the percentage of industry sales accounted for by the "X" largest firms, where "X" can equal any number of firms Percentage of total sales of the biggest firms bigger the percentage, morel likely to be oligopoly

HHI

square of each firm's share of market sales summed over the firms in the industry; bigger the #, less competitive For example, if an industry contains only three firms and their market shares are 60%, 25%, and 15%, the HHI for the industry is: HHI = 60^2 + 25^2 + 15^2 = 4,450