market structures

• features of markets - market structure matrix

  barriers to entry

  number of firms

  market share of the largest firms

  turnover of customers

  nature of costs

  product differentiation

  degree of integration

  interdependence of firms

  structure of buyers
• costs and market structure

  entry costs into a market

  sunk costs/exit costs (costs that can't be recovered e.g. marketing and advertising or capital depreciation)

  natural cost advantages

  control of the supply chain in a market through vertical integration
• short run

  at least on input used in the production process is fixed, cannot be easily changed

  firms can change their output levels by varying their variable inputs like raw materials or energy, the are unable to make significant changes to their overall production capacity
• long run

  all inputs are variable, firms can adjust their production levels and cost structures more freely

  firms have greater flexibility to adjust their production levels and cost structures to respond too changes in market conditions
• homogenous


  same identity/product

  strong substitutes
• heterogeneous

  different identity/product
• why do we care that markets differ

  market structure affects competition

  will affect how a firm behaves - low prices

  will affect performance, outcomes of those behaviours - product efficiency but possibly no dynamic efficiency
• concentration ratios


  measures used to describe the level of market concentration in an industry, typically calculated by summing the market share of the top N firms in an industry, where N can be any number of firms

  used by economists and antitrust regulators (look out for monopoly power) to assess the level of competition in a particular industry, higher concentration ratios indicate that a smaller number of firms control a larger share of the market, vice verso for lower concentration ratios
• common errors of concentration ratios

  counting 'other' as largest firm

  not including 'other' firms in TMR (total market ratio)

  calculating revenue without expressing as a % of a whole