Market_Structures

MARKET STRUCTURES A. Monopoly, perfect, oligopoly, sole trade and monopolistic are examples of market structures. i. Monopolistic competition faces a downward slopping demand curve. ii. Monopolistic competition has both features of a monopoly and perfect competition. The firm in the short run In the short run it operates as a monopoly of some kind. Its product is quite different from other firms’ products. This enables it to have influence in its own segment of the overall market. Thus, other firms outside the market pose no threat to it. The short run equilibrium position is the same as that of the monopolist as shown in figure 2.1. costs/revenue Fig. 2.1 Output The firm is able to make abnormal profits of CPAB. At output Q, profits are maximised where the marginal cost is equal to the marginal revenue. Output Q is the equilibrium output while P is the equilibrium price. The firm in the long run In the long run, the firms outside the market will move in because of the supernormal profit they see in the long run. The effect of this on a firm is that the demand for its product will be reduced as some of its customers will move to other brands. Graphically, the demand and marginal revenue curves will shift to the left as shown in figure 2.2 below. The entry of a new firm shifts the demand curve of the existing firm to the left (from D to D1 when compared to figure 2.1). The firm will continue to maximise its profits by putting the new marginal revenue, MR1, equal to marginal cost though the will now be lower. costs/revenue Output Fig. 2.2 B. CHARACTERISTICS OF OLIGOPOLY Oligopoly refers to markets dominated by few large firms. The entire output of the market is produced few firms. An oligopolistic market has the following characteristics. 1. There are very few firms competing with each other for the whole market. They have similar knowledge of input requirements and of their market, leading their cost structures to be similar, as well as their prices. 2. Because there are few firms competing on the market, it therefore means that firms cannot take decisions independently of decisions made by competitors. For example, a price cut will not necessarily lead to more sales, as competitors might react by cutting their prices too. This is common in the petrol industry. 3. The whole industry loses if prices were reduced because of competition. As a result firms rely on non-price competition to maintain or increase their market share. Competition often takes different forms, mostly product differentiation supported by advertising, special offers and extra services offered at the point of sale, or after sale. 4. As an alternative to competition, particularly that involving price-setting, one firm is frequently dominant and takes the lead in setting the market price. Other, smaller firms simply follow the dominant one, which is called the ‘price leader’. 5. Cartels often form. A cartel is a group of firms acting together to fix prices and/or output. Firms in an oligopoly prefer to come to an agreement on pricing in order to achieve profit maximisation. The cartel also generally agrees on output of each of its members and the prices to be charged. It is effectively a monopoly. Bibliography 1. Nuttall, C. et’al (2001) Success in Economics 4the.d. London: John Murray Publishers. 2. Stanlake, G.F (1976) Introductory Economics 3rd e.d. London: Longman Group Ltd. 3. ZICA NATech Textbook (1998) Paper 1.3 Economics Feltham: Foulks Lynch Ltd