L4: market structures Flashcards
What is a Competitive Market?
A market with many buyers and sellers trading identical products so that each buyer and seller is a price taker.
refers to how industries are classified and differentiated into:
- Size Number of buyers and sellers
- Barriers to entry and exit
- Nature of the product or service
Market Structures
Market Structures refers to how industries are classified and differentiated into:
- Size Number of buyers and sellers
- Barriers to entry and exit
- Nature of the product or service
It is characterized by a complete absence of rivalry among the individual firms.
Perfect Competition
Each individual player in the market is relatively small and cannot influence the market as a whole
Perfect Competition
Assumptions in Perfect Competition
- Large number of sellers and buyers
- Product homogeneity
- Free entry and exit of firms
- Profit Maximization
- No government regulation
Buyers and sellers are price takers.
- Large number of sellers and buyers
The technical characteristics of the product as well
as the services associated with its sale and delivery
is identical.
- Product homogeneity
Entry or exit may take time but firms have freedom
of movement in and out of the industry.
There is no barrier to entry and to exit.
- Free entry and exit of firms
The goal of all firms is profit maximization.
- Profit Maximization
There is no government intervention in the market
(tariffs, subsidies, rationing of production)
- No government regulation
There is only one supplier of a product or service
Monopoly
Products and services have no close substitutes
Monopoly
E.g
- gas,
- electricity,
- water,
- cable TV, and
- local telephone service companies
Monopoly
in monopoly the ff. conditions are essential:
- One and only one firm produces and sells particular commodity or a service.
- There are no rivals or direct competitors of the firm.
- No other seller can enter the market for whatever reasons – legal, technical or economic.
- Monopolist is a price maker.
Sources of Monopoly
- Legal Restrictions
- Capital Costs
- Natural Factor Endowment
- Some public sector services are statutory monopolies, which means their position is protected by law.
- A monopoly position might also be protected by a patent.
(under sources of monopoly)
1. Legal Restrictions
Certain business such as international airlines and chemical companies have relatively high set-up costs.
(under sources of monopoly)
2. Capital Costs
A particular country has a monopoly in the supply of a particular commodity.
(under sources of monopoly)
3. Natural Factor Endowment
It is a situation in which only few firms are competing in the market for a particular commodity.
Oligopoly
Few sellers with identical products
Oligopoly
Oligopoly Strategic Behavior
- Limit Pricing
- Price Retaliation
Setting prices below the profit maximizing level in order to reduce the possibility of entry of new firms in the market.
(under Oligopoly Strategic Behavior)
1. Limit Pricing
Firms may retaliate by reducing prices when entry actually occurs.
(under Oligopoly Strategic Behavior)
2. Price Retaliation
