Section 4 - Market Structure and Market Failure

• Market Structure is defined as the features/characteristics that determine the behavior and performance of firms in the industry
• Types of market structures

  • Monopoly
  • Oligopoly
  • Monopolistic competition
  • Perfect competition
• Perfect competition


  • Many sellers
  • Many buyers
  • Homogeneous product
• Examples of perfect competition

  • Farming produce (milk, potatoes, rice, fruits, vegetables)
  • Gas stations
  • Stock exchange
• Features of perfect competition

  • Many sellers
  • Many buyers
  • Homogeneous market
  • Perfect knowledge
  • No one firm can influence price
  • Firm is a price taker
  • Freedom of entry and exit
• Perfect competition is a theoretical concept, and, in the real world, there are no perfect markets
• Perfect knowledge


  All buyers and sellers are aware of the product, its features, its price, and they are aware of other buyers and sellers
• Price taker

  A producer who has no power to influence prices
• In the perfect competition, the market structure will the stay the same for a long period of time, unless there is a radical change
• Monopoly


  • One seller
  • Many buyers
  • No competition
  • Product is unique and has no close substitutes
  • Imperfect knowledge
  • Firm produces a given quantity and sells it at the price the market is willing to pay
  • Firm is a price maker
  • Extreme barriers to entry

  
• Imperfect knowledge


  Buyers and sellers are not aware of all the information in the market
• Price maker


  The firm can determine the price of their product
• Examples of Monopolies


  • Carib Brewery Ltd in Trinidad
  • State owned water companies
  • State owned electricity companies
• Barriers to entry for Monopolies

  • Government regulations
  • Patents
  • Large capital outlay
  • Ownership by the firm of a scarce factor of production
• Patent


  A patent grants the inventor exclusive rights to the patented products or process
• In the monopoly, the market structure will stay the same, unless there is some radical change

  
• Monopolistic competition

  • Many buyers and sellers
  • Product is similar yet differentiated through branding
  • Imperfect knowledge
  • Firms are price makers
  • Some barriers to entry

  
• Product differentiation


  The product is made to look different in the eye of the consumer
• Examples of monopolistic competition

  • Restaurants
  • Hair salons
  • Beauty salons
  • Supermarkets
• Oligopoly

  • Many buyers
  • Few sellers
  • Product might be homogeneous or differentiated
  • Imperfect knowledge
  • Firms avoid price competition and so prices remain rigid or there is price stickiness
  • Firms might collude
  • High barriers to entry
• Price rigidity


  Prices remain at a certain level over a long period of time
• Collusion


  Price and quantity agreements with other firms
• Oligopolies are typical in the real world
• Characteristics of a perfectly competitive market

  • Actions of any single buyer or seller have a negligible impact on the market price
  • Each buyer and seller takes the market price as given
• Competitive market


  Many buyers and sellers trading identical products so that each buyer and seller is a price taker
• In perfect competition, average revenue equals the price of a good
• For competitive firms, marginal revenue equals the price of the good

  
• Profit maximization point is where marginal revenue equals marginal cost

  
• Shutdown


  A short-run decision not to produce anything during a specific period because of current market conditions

  
• Exit


  A long-run decision to leave the market
• Sunk costs


  Costs that have already been committed and cannot be recovered
• Conditions for a firm to shut down in the short run

  • TR < VC
  • TR/Q < VC/Q
  • P < AVC
• Conditions for a firm to exit in the long run

  • TR < TC
  • TR/Q < TC/Q
  • P < ATC
• Conditions for a firm to enter the market/industry

  • TR > TC
  • TR/Q > TC/Q
  • P > ATC
• Marginal cost curve


  The portion that lies above average variable cost is the competitive firm's short-run supply curve

  
• Conditions that would make a firm exit in the long run

  • TR < TC
  • TR/Q < TC/Q
  • P < ATC
• Once revenue is less than cost in the long run, it would be best for the firm to exit the market
• In the long run, a firm cannot be continuously experiencing losses
• Conditions that would make a firm enter the market/industry

  • TR > TC
  • TR/Q > TC/Q
  • P > ATC
• Competitive firm's long run supply curve

  The portion of its marginal-cost curve that lies above the average total cost