Chapter 5Chapter 5 The Nature of Markets The Nature of Markets

Gr. 12 EconomicsGr. 12 Economics

Chapter FocusChapter Focus

The four market structures– perfect The four market structures– perfect competition, monopolistic competition, competition, monopolistic competition, oligopoly, and monopoly—and the oligopoly, and monopoly—and the characteristics of eachcharacteristics of each

The demand conditions for businesses in The demand conditions for businesses in each market structureeach market structure

Nonprice competition through product Nonprice competition through product differentiation and advertisingdifferentiation and advertising

Industrial concentration—how it is measured, Industrial concentration—how it is measured, and the arguments for and against itand the arguments for and against it

Market StructuresMarket Structures

Perfect CompetitionPerfect Competition A market structure characterized by A market structure characterized by

many buyers and sellers of a standard many buyers and sellers of a standard product and easy entry to and exit product and easy entry to and exit from the industryfrom the industry

1.1. Many Buyers and SellersMany Buyers and Sellers

2.2. Standard ProductStandard Product

3.3. Easy Entry and ExitEasy Entry and Exit

Market StructuresMarket Structures

Monopolistic CompetitionMonopolistic Competition A market structure characterized by A market structure characterized by

many buyers and sellers of slightly many buyers and sellers of slightly different products and easy entry to, and different products and easy entry to, and exit from, the industryexit from, the industry

OligopolyOligopoly A market structure characterized by only A market structure characterized by only

a few businesses offering standard or a few businesses offering standard or similar products and restricted entry to similar products and restricted entry to the industrythe industry

Market StructuresMarket Structures

MonopolyMonopoly A market structure characterized by A market structure characterized by

only one business supplying a product only one business supplying a product with no close substitutes and restricted with no close substitutes and restricted entry to the industryentry to the industry

Entry BarriersEntry Barriers Economic or institutional obstacles to Economic or institutional obstacles to

businesses entering an industrybusinesses entering an industry

Types of Entry BarriersTypes of Entry Barriers

1.1. Economies of ScalesEconomies of Scales Natural monopoly: a market in which Natural monopoly: a market in which

only one business is economically only one business is economically viable because of a economies of scaleviable because of a economies of scale

2.2. Market ExperienceMarket Experience

3.3. Restricted ownership of ResourcesRestricted ownership of Resources

Types of Entry BarriersTypes of Entry Barriers

4.4. Legal ObstaclesLegal Obstacles

5.5. Market Abuses Market Abuses Predatory pricing: Predatory pricing: an unfair business practices of an unfair business practices of temporarily lowering prices to drive temporarily lowering prices to drive out competitors in an industryout competitors in an industry

6.6. AdvertisingAdvertising

Market PowerMarket Power

Market PowerMarket Power A business’s ability to affect the price A business’s ability to affect the price

of the product it sellsof the product it sells

1.1. Number of CompetitorsNumber of Competitors

2.2. SizeSize

3.3. Price Elasticity of DemandPrice Elasticity of Demand

Demand DifferencesDemand Differences

Business’s demand curveBusiness’s demand curve The demand curve faced by an individual The demand curve faced by an individual

business, as opposed to an entire marketbusiness, as opposed to an entire market

Demand DifferencesDemand Differences

Monopolistic Monopolistic CompetitorCompetitor

OligopolyOligopoly

Mutual interdependence Mutual interdependence The relationship among oligopolists, in which the actions of each The relationship among oligopolists, in which the actions of each

business affect the other businessesbusiness affect the other businesses

Rivalry Among BusinessesRivalry Among Businesses Market shareMarket share

A business’s proportion of total market salesA business’s proportion of total market sales

Demand DifferencesDemand Differences

MonopolyMonopoly

Nonprice CompetitionNonprice Competition

Nonprice Competition and the ConsumerNonprice Competition and the Consumer

Product differentiation leads to higher prices Product differentiation leads to higher prices by raising per-unit costs and enhancing an by raising per-unit costs and enhancing an individual business’s market power. individual business’s market power. However, consumers will likely have more However, consumers will likely have more choices because of businesses efforts to choices because of businesses efforts to differentiate their productsdifferentiate their products

Nonprice CompetitionNonprice Competition

Nonprice CompetitionNonprice Competition Efforts to increase demand through product Efforts to increase demand through product

differentiation, advertising, or bothdifferentiation, advertising, or both

1.1. Product DifferentiationProduct Differentiation Efforts to make a product distinct from that Efforts to make a product distinct from that

competitorscompetitors

2.2. AdvertisingAdvertising raises prices for consumersraises prices for consumers offer more variety and choiceoffer more variety and choice raises profits for businessraises profits for business

Industrial ConcentrationIndustrial Concentration

Concentration RatioConcentration Ratio The % of total sales revenue in a market The % of total sales revenue in a market

earned by the largest businessearned by the largest business

The Debate Over Industrial ConcentrationThe Debate Over Industrial Concentration

Industrial concentrationIndustrial concentration Domination of a market by one or a few large Domination of a market by one or a few large

companies ( 4 firms > 50% sales revenue) companies ( 4 firms > 50% sales revenue)

Arguments for Arguments for 1.1. Economies of scaleEconomies of scale2.2. Technical innovationTechnical innovation

Arguments against:Arguments against:1.1. Market power (higher price)Market power (higher price)2.2. Lack of competition ( poorer quality, less Lack of competition ( poorer quality, less

innovation)innovation)

Kind of Market Pure CompetitionMonopolisticCompetition

Oligopoly (Homogeneous)

Oligopoly(Differentiated)

Pure Monopoly

Number ofproducers andtype of product

• Many sellers

• Identical product

Many sellers Some product

distinction

Few sellers Some product

distinction

Few sellers Much product

distinction

One seller No product

substitutes

Conditions ofentry intoindustry

Easy to enter

Easy to enter the

Difficult to enter Difficult to

enter

Very difficult or impossible to enter

Influence over price

No control over price

Some control over price

Limited by interdependence or firms

Some control over price

Limited by interdependence of firms—“price searcher”

Considerable control over price – “ price maker”

Existence ofnon-pricecompetition

None

Some—especially advertising

Little use made of advertising

Considerable non-price competition—like advertising

Advertising of firm’s “image”

Example:

Stock market

Certain agricultural markets

Retail trade Clothing Many services

industries

Steel Aluminium Pulp Cement

Automobiles Tires Breakfast

cereals Soap

Electrical energy

Water Gas Urban

transit system