Business Environment LO 1: MARKET STRUCTURES SESSION 09 : 17/11/2016

Transcription

1 Business Environment LO 1: MARKET STRUCTURES SESSION 09 : 17/11/2016

2 Introduction to market structures KEY CONCEPT A market structure is an economic model that helps economists examine the nature and degree of competition among businesses in the same industry. WHY THE CONCEPT MATTERS The level of competition in a market has a major impact on the prices of products. The more sellers compete for your dollars, the more competitive prices will be.

3 Introduction to market structures Four basic market structures exist and these are distinguished based on: Number of producers and consumers Amount of business each company does within the market Types of products being traded Amount of information made available between companies and consumers

4 Introduction to market structures Four different market structures are: Perfect competition Monopoly Monopolistic Oligopoly

5 01. PERFECT COMPETITION Perfect competition describes a market where there are many small firms producing homogeneous goods.

6 01. PERFECT COMPETITION-CHARACTERISTICS Characteristic 1: Many Buyers and Sellers No one buyer or seller has power to control price in the market Many sellers means buyers can choose a producer with better price Many buyers means sellers can all sell product at market price

7 01. PERFECT COMPETITION-CHARACTERISTICS Characteristic 2: Standardized Product Standardized product one producer s product is identical to another s Perfect substitutes include agricultural products, such as wheat, eggs, milk basic commodities, such as notebook paper, gold Price is only basis for consumer choice

8 01. PERFECT COMPETITION-CHARACTERISTICS Characteristic 3: Freedom to Enter and Exit Markets Producers can enter market when profitable and exit when unprofitable Regulations do not restrict businesses from entering or exiting Characteristic 4: Independent Buyers and Sellers Neither buyers nor sellers join together to influence price Supply and demand set the equilibrium price Independent action ensures that market stays competitive

9 01. PERFECT COMPETITION-CHARACTERISTICS Characteristic 5: Well-informed Buyers and Sellers Buyers can compare prices Sellers know what competitors charge, what buyers willing to pay Price taker seller that accepts market price set by supply and demand

10 02. MONOPOLY Monopoly occurs if there is only one provider for a product. It is considered for a monopoly market structure there will not be any substitutes. E.g. Waterboard in Sri Lanka, Sri Lankan postal services

11 02. MONOPOLY-CHARACTERISTICS Characteristic 1: Only One Seller Single business controls supply of product without close substitutes De Beers cartel controlled diamond market in 20th century because produced over half of world s diamond supply bought up diamonds from smaller producers to resell

12 02. MONOPOLY-CHARACTERISTICS Characteristic 2: A Restricted, Regulated Market Government regulations allow single firm to control market De Beers worked with South African government restricted access of other producers controlled supply of diamonds Characteristic 3: Control of Prices Monopolists can control prices because there are no close substitutes During economic downturns, De Beers created artificial shortage by withholding diamonds from market, kept prices higher

13 Types of monopolies Natural monopoly cost of production lowest with only one producer Government monopoly government owns and runs or permits only one producer Technological monopoly one firm owns invention, technology, method Geographic monopoly no other sellers within a region

14 Types of monopolies Example 1: Natural Monopoly: A Water Company Example 2: Government Monopoly: The Postal Service In some markets, inefficient to have companies competing Government runs some businesses that provide goods and services Example: public utilities that require complex systems private firms cannot or do not want to provide because of low profits economies of scale average production cost falls as production grows Government both supports and regulates Example: Postal Service has sole right to deliver first-class mail New services and technologies now compete private delivery companies, fax, , online bill paying

15 Types of monopolies Example 3: Technological Monopoly: Polaroid Example 4: Geographic Monopoly: Professional Sports Patent legal registration of invention; gives inventor sole rights Sports leagues tie teams to cities, regions; limit number of teams enables businesses to recover costs of development owners can charge high ticket prices, sell team merchandise Monopoly lasts for time limit of patent or until substitute invented Physical isolation no other supplier in area lets owner control prices Patent let Polaroid keep Kodak out of instant-photography market Very small market may not support two businesses of same type simpler cameras, digital cameras, quick processing reduced its market

16 Profit maximisation by monopolies KEY CONCEPTS Monopoly cannot set prices too high faces downward-sloping demand curve raises equilibrium price by producing less than competitive market would Most countries have laws to prevent monopolies EXAMPLE: Drug Manufacturer Drug companies maximize profits during patent period afterwards, others market cheaper generic versions Schering-Plough strongly marketed non-drowsy antihistamine Claritin made up to $3 billion per year worldwide with patent after patent ended sales dropped to about $1 billion per year

17 03. MONOPOLISTIC COMPETITION Most real markets fall between perfect competition and monopoly Monopolistic competition many sellers offer similar products one of most common market structures product differentiation sellers try to distinguish their products from similar ones Differentiation can be based on quality, features, design, sales promotions, advertising, customer knowledge, availability. nonprice competition use factors other than price to attract customers

18 MONOPOLISTIC COMPETITION Are these shampoos/conditioners different? Pantene $14.50 Frederic Fekkai $54 Gap Levis Licc

19 survey large numbers of consumers MONOPOLISTIC COMPETITION-CHARACTERISTICS Characteristic 1: Many Sellers and Many Buyers Many sellers and many buyers fewer sellers than perfect competition but enough for true competition Each seller chooses product to make, amount to make, price to charge examples include T-shirts, batteries, hamburger restaurants Characteristic 2: Similar but Differentiated Products Consumer loyalty gained with unique product or apparent difference Sellers use market research to decide how to differentiate product Chains use sophisticated techniques learn consumer lifestyles, tastes focus groups moderated discussions with small groups of consumers

20 MONOPOLISTIC COMPETITION-CHARACTERISTICS Characteristic 3: Limited Control of Prices Differentiation gives producers limited control of prices low price distinguishes some products name brands or better quality priced higher Consumers pay extra if they perceive important enough difference will switch to substitute if price goes too high Characteristic 4: Freedom to Enter or Exit Market No great barriers to entry in monopolistically competitive markets when firms earn profit, other firms enter and increase competition competition can be difficult for small businesses against large ones Some firms start to take losses signal that it is time to exit the market

21 04. OLIGOPOLY Oligopoly market structure with only a few sellers offering similar product Less competitive than monopolistic competition each firm has large market share percent of total sales in the market Few firms due to high start-up costs expenses of entering market

22 04.OLIGOPOLY EXAMPLE Coca-Cola Classic Coca-Cola classic Sprite Dasani Barq's Dannon Nestea Rockstar Evian Fanta Fresca Minute Maid Mr. Pibb Powerade Seagrams Ginger Ale & Mixers TAB Pepsi-co Aquafina Pepsi Mountain Dew Sierra Mist Sobe Lipton Brisk Tea MUG Root Beer Slice Gatorade Dole Juice Tropicana

23 04.OLIGOPOLY CHARACTERISTICSS Characteristic 1: Few Sellers and Many Buyers A few firms dominate market industry is oligopoly if four firms control 40 percent of market Sri Lankan biscuit market: Munchee and Maliban, Sri Lankan Gas providers: Laughs and Shell Characteristic 2: Standardized or Differentiated Products Many industrial products are standardized such as cement firms differentiate by brand name, service, location Many consumer goods are differentiated use marketing strategies, such as focus groups, surveys create brand-name products that can be marketed widely

24 04.OLIGOPOLY CHARACTERISTICSS Characteristic 3: More Control of Prices Each firm s decisions about supply and price affect entire market If one firm lowers prices, others probably will too no firm gains market share from price drop; all risk losing profits If one raises prices, others may not in order to gain market share Anticipate competitors response to price, output, marketing changes

25 04.OLIGOPOLY CHARACTERISTICSS Characteristic 4: Little Freedom to Enter or Exit Market High start-up costs such as factories, warehouses make entry hard new firm may sell on small scale; hard to compete with established ones Established firms have resources, patents, economies of scale High investment by firms in oligopoly make exit difficult operations too vast, complex to sell and reinvest easily

26 Thank You!