3MARKET FORCES (3.3) 57Market Types

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1 MARKET FORCES (.) 57 Market Types

58 MARKET FORCES (.) BEFORE you start this unit (in pencil)... write the key idea of this unit in the centre of the page write what you know about this idea around it and draw lines to them.

2 58 MARKET FORCES (.) BEFORE you start this unit (in pencil)... write the key idea of this unit in the centre of the page write what you know about this idea around it and draw lines to them. try and group the ideas together Mind-maps are very good revision tools. Our minds learn by making patterns. Mind-maps help you to make these patterns and so makes the content easier to learn and remember. mind-map AFTER you finish this unit (in pencil)... remove anything that doesn t belong to this unit ensure that things are grouped together appropriately. Move stuff around if needed add any extra ideas that you think are missing

3 MARKET FORCES (.) 59 topic.1 market types one of these things is not like the other one In achievement standard.2 we looked at two types of markets - perfect competition and monopoly. These are the two extreme examples of perfectly competitive and imperfectly competitive markets. In this unit we look at the other types of markets, and how consumers and producers behave in these markets. by the end of this topic, you should be able to... o define what a market is and give New Zealand examples of different market types o describe demand in different market types o classify markets by how competitive they are o describe a monopsony o identify and describe different marketing strategies remember - try the exercises and then read the notes to learn what you don t know.

4 60 MARKET FORCES (.) Research the following firms and determine what the market is... and what kind of market structure exists in that market. Justify your answers in the space provided. 1. Z Oil (NZ) Ltd Market: Structure: Justification: 2. Farm Cove airy Market: Exercise.1 Market Structures Structure: Justification:. NZ Post Market: Structure: Justification: 4. NZ Rail Market: Structure: Justification: 5. Toyota International Inc. Market: Structure: Justification:

5 MARKET FORCES (.) 61 The Commerce Commission is responsible for enforcing various laws relating to market efficiency in New Zealand. Below are some of the cases that the Commission has dealt with. November Commerce Commission vs Infratil NZ Ltd NZ Bus Ltd (owned by Infratil) owned 24% of Mana Coach Services Ltd in Wellington. It sought to purchase the remaining 76% of the company. The Commerce Commission argued that this would substantialy lessen competition in the Wellington region. NZ Bus operated 74 buses in the region giving it aproximately 69% market share. Mana was the second largest company with 115 buses. and approximately 28% market share. NZ Bus argued that as they already owned 24% of Mana, they should be allowed to purchase the remaining 76%. The Commerce Commission disagreed. 1. What do you think the court should decide in this case? Should NZ Bus Ltd be allowed to buy the remaining shares in Mana Coach Services Ltd... or not? Your answer may include further information that you would like to know before you make your ruling. June Commerce Commission vs NZ iagnistics & Hamilton Medlab In 2004 NZ iaganostic Group and Hamilton Medlab entered into an agreement with the Waikato istrict Health Board that the two companies would work cooperatively to provide medical testing services to the health board, and not compete to win customers. In return the Health Board agreed that its medical laboratory would not try to provide similar services to local general practitioner (doctors) practices. The Commerce Commission argued that this was anti-competitive, as it was an agreement to limit competition in the market. Exercise.2 Market Stuructres 2. What do you think the court should decide in this case? The companies and health board argued that it simplified the market and allowed them to provide a more efficient and high quality service to the public. The commission argued it reduced competition. Your answer may include further information that you would like to know before you make your ruling.

6 62 MARKET FORCES (.) Answer the following multiple choice questions: 1. Which of the following is not an important difference between perfect competition and monopolistic competition? a. Few sellers rather than many. b. Heterogeneous product rather than homogeneous product. c. Barriers to entry, rather than freedom of entry. d. Long-Run, positive economic profits rather than zero economic profits. 2. Oligopoly may be associated with all but which one of the following? a. Price leadership. b. Collusive behaviour. c. Advertising. d. Lots of firms. Exercise. Market Structures. An entrepreneur who monopolises a previously competitive industry and now faces the same demand curve and produces with the same cost function, will typically maximise profits by... a. forcing consumers to buy more at a higher price. b. producing less but charging a higher price. c. increasing volume. d. lowering both output and price. 4. At its present output, the following information applies to a particular firm: AR > AC AR > MR MR > MC The firm could be... a. an oligopolist in short-run equilibrium. b. a monopolistically competitive firm not yet maximising profits. c. a duopolist restricting output in order to maximise profits. d. a monopolistically competitive firm not yet maximising profits. 5. In New Zealand, there are only two supermarket chains. What kind of market structure is this? 6. There is a great deal of price competition between supermarkets. Explain why this does not follow standard micro-economic theory. Your answer should describe the kind of competition that you would expect to see in this market structure (type). 7. Woolworths offers its customers a ONECAR that gives customers discounts when they buy goods from Woolworths. What kind of marketing strategy is this? 8. What is the benefit of ONECAR to Woolworths?

7 Market Types MARKET FORCES (.) notes 6 efine Market and Give New Zealand Examples In economics we define a market as any place or situation where buyers and sellers exchange goods or services. It might be a place such as a flea market (or farmer s market) or a supermarket. Alternatively it might be a situation such as Trade Me, ebay or the classified advertisements in a newspaper. The word market can also be used to refer to a group of firms who produce the same good (or service) and the consumers who buy that good. For example, we talk about the telecommunications market or the insurance market. A market can also be defined geographically, such as the Auckland market for builders or the South Island market for bread. Figure.1 gives the Commerce Commission s definition of a market. Figure.1... efining a Market According to the Commerce Commission The Commerce Commission is charged with protecting consumers from anti-competitive behaviour, such as price-fixing (see Figure.2 below). To determine whether competition is being reduced in a market, the Commission must first define what the market is. The Commission defines a market as all suppliers and buyers between whom there is close competition. markets in terms according to five criteria or dimensions: 1. Product imension How similar are the goods or services supplied and purchased, i.e. are they close substitutes? 2. Geographical imension What is the geographical area within which the goods or services are supplied?. Functional imension Are the goods or services at the same level in the production or distribution chain? 4. Temporal (Time) imension What time frame does the market operate over (e.g. a daily newspaper vs a monthly magazine)? 5. Customer imension What are the different customer types within a market, where relevant? It defines Based on these dimensions, the Commission defines a market as the smallest space within which a firm which could increase the price (say 5-10%) and sustain this higher price without other firms competing to bring the market price down. Below is an examples of the commission taking legal action against firms for anti-competitive behaviour: The Warehouse In 2006, The Warehouse introduced its new hypermarkets large supermarkets tacked on to their existing outlets. This was to compete with Foodstuffs who, including all subsidiaries, accounted for approximately 56% of the total New Zealand s supermarkets grocery sales and Woolworths 44% i.e. a duopoly. Foodstuffs and Woolworths wanted to take over The Warehouse and sought approval from the Commerce Commission. Under the Commerce Act (1986) the Commission must consider whether such takeovers are likely to have the effect of substantially lessening competition in a market. The Commission decided that loss of existing and potential competition from an innovative firm in circumstances where it is the only likely entrant for the foreseeable future would substantially increase the market power of Foodstuffs and Woolworths. It argued this would very likely result in higher prices and lower quality, service and innovation in the market. Consequently the Commission did not allow the takeover. Source: visited on 15 May 201 The Commerce Commission is very interested in being able to define a market. Part of the Commission s role is to stop anti-competitive behaviour, such as price fixing (see Figure.2). Anticompetitive behaviour is usually bad for consumers because it can lead to less choice, higher price and/or poorer quality of product or service.

8 64 MARKET FORCES (.) Figure.2... Price Fixing Price fixing is when two or more firms in the same market agree to charge the same price to consumers. By acting together, firms can force consumers to pay higher prices rather than being able to switch from one supplier to another to get lower costs. Price fixing is anti-competitive and is clearly negative for consumers. In most market economies price fixing is illegal. This includes New Zealand where it is illegal under the Commerce Act. Ophthalmologists (Eye Surgeons) In 2005, a group of ophthalmologists in Palmerston North negotiated jointly with the local istrict Health Board (HB) to provide eye services. The group consisted of different businesses who agreed to negotiate together. The Commerce Commission argued that by negotiating together, the HB was unable to get alternative, competitive prices. In the end, the case was settled out of court with the Commission fining the ophthalmologists group International Freight From 2010 through to 201, the Commerce Commission investigated firms providing air freight in and out of New Zealand. It found that firms colluded, i.e. agreed to not compete on price, and so acted against the interests of consumers by reducing (price) competition in the market.. As at May 201, the Commerce Commission had settled with several airlines who admitted to the charge. This included ANTAS, Singapore Airlines, Malaysian Airlines and others. These firms were fined for their anti-competitive behaviour. For example, ANTAS was fined 6.5 million. escribe the emand Curve in ifferent Market Types The demand curve faced by the individual firm differs depending on the type of market. These differences are described in Figure. below. Figure.... Individual Firms emand Curves Price PERFECT COMPETITION Price MONOPOLISTIC COMPETITION.5 10 emand for one firms output is perfectly elastic Because the firm s product is identical to all other firms products, consumers will stop buying that firm s goods if it raises the price even slightly. 20 emand for one firm s output is elastic but not perfectly so. Individual firms have a small control over the price as each firm s goods differ very slightly Price OLIGOPOLY Price UOPOLY Each firm faces a kinked demand curve. Market price will tend to stay constant. Above market price, demand is elastic. If a firm raises its price, consumers will switch to goods produced by other firms who keep their prices down. Below market price, demand is inelastic. If one firm drops its price, other firms will quickly drop their prices also. This means that the firm will not pick up many extra customers by dropping its price. 00 Market demand is shared by two firms. Price 6 MONOPOLY 700 The firm s demand curve is the same as the market demand curve.

9 MARKET FORCES (.) 65 Classify Markets by the Level of Competition In Achievement Standard.2, we examined two opposite types of markets perfect competition and monopolies. They illustrate two broad types of markets... perfect and imperfect. However, within imperfect competition we can further distinguish the type of market, as shown in Figure.4. Figure.4... Perfect vs. Imperfect Competition Highly Competitive Markets Perfect Competition All four assumptions are fully met. Imperfect Competition Monopolistic Oligopoly uopoly Monopoly Competition One or more assumptions is(are) broken. Less Competitive Markets Perfectly competitive markets occur when the four assumptions of perfect competition (see Unit 6) occur. Imperfect competition occurs when one or more of the perfect competition characteristics are broken. These markets can be distinguished by certain characteristics as summarised in Figure.5. Perfect Competition Monopolistic Competition Imperfect Competition Figure.5... Market Characteristics Oligopoly uopoly Monopoly Many firms. Many firms. Few firms. Two firms. One firm. No barriers to entry for new firms. Weak barriers to entry. Strong barriers to entry. Strong barriers to entry. Very strong barriers to entry. Identical products. Very similar products. Similar products. Similar products. One product. Perfect knowledge. Imperfect knowledge. Imperfect knowledge. Imperfect knowledge. Imperfect knowledge. Firms are price-takers. Firms have little influence on price (or quantity). Firms have some influence on price or quantity. Firms have some influence on price or quantity. Market strategy: none. Product differentiation. Product differentiation. emand Curve for Individual Firm: Firm has total control over price or quantity. 10 e.g. none.5 20 e.g. dairies, builders e.g. banks, oil companies 5 00 e.g. supermarkets (Foodstuff) e.g. Transpower, Airways Corporation Monopolistic Competition: An imperfectly competitive market where there are many firms. Oligopoly: A market dominated by a few (e.g. -7) large firms. uopoly: A market with only two firms.

10 66 MARKET FORCES (.) escribe a Monopsony One further type of market is a monopsony. This is a market where there is only one consumer. An example of this is the New Zealand Transport Agency (formerly Transit New Zealand), which builds motorways and roads. It is owned by the Government to buy road-making services on behalf of the public. In a monopsony, the one consumer has considerable market power, as different firms compete to do business with this consumer. Monopsony: A market with only one consumer. Identify and escribe Price Marketing Strategies The most obvious way firms can compete with each other is by lowering their price to undercut competitors. This can be done directly by lowering the selling price or by offering discounts. As Figure.6 shows, dropping the price of a good or service is shown as a movement along the demand curve. MARKET FOR CELLPHONES Figure.6... Price Competition A fall in prices causes a movement along the demand curve as P falls and rises. P 1 P The success of a pricing strategy depends on the price elasticity of demand. emand Identify and escribe Non-Price Marketing Strategies Rather than competing by price, firms can compete with a number of non-price strategies. There are various types of non-price marketing strategies. MARKET FOR CELLPHONES Figure.7... Non-Price Competition A non-price marketing strategy causes the entire demand curve to shift, i.e. consumers are willing to buy more goods at all price levels. P

11 MARKET FORCES (.) 67 Product ifferentiation This is when a firm sells the same product (e.g. car types) as its competitors but tries to make it appear different to customers (e.g. better service, coffee while you wait, eco-friendly) to appeal to them. A good example of this is banks who mostly sell the same financial services (e.g. savings account) but market their customer service. Product Variation This is when a firm changes its product so it is actually different to other firms goods or services. For example, a car manufacturer may add extra features such as bluetooth and rear-vision cameras, or phone manufacturers add more features such as Facetime and eye movement monitoring. Many firms also use vertical product variation. This is where a firm offers different versions of a product to appeal to different income levels. For example, the luxury version of a car might have leather seats, a larger engine and better quality tyres... while the budget version has less features. Other Non-Price Strategies Other non-price strategies to increase demand include: consumer loyalty programme sponsorship tele-marketing Because they involve a change in a non-price factor, we show the effects of non-price marketing strategies as a shift of the entire demand curve - see Figure.7. Identify the Implications of Market Structure on Producers and Consumers The level of competition in a market affects producers and consumers in a number of different ways: Loss of Consumer and Producer Surplus An imperfectly competitive market will typically result in a market equilibrium that is less than the equilibrium that would occur in a perfectly competitive market. This means that some consumer and producer surplus is lost from the market, i.e. there is deadweight loss. Higher Prices Less competition often means higher prices... good for producers, but bad for consumers. Innovation Less competition decreases the incentive to innovate, because there are less competing firms to take your customers if you don t innovate. However, in perfect competition there is also no incentive to innovate as competing firms will automatically copy you (perfect competition). The trick for the government is to strike a balance between allowing some loss of competition to create incentives to innovate. Lack of Access to Markets Imperfect competition can occur due to barriers to entry. This is bad for possible entrants who would like to enter a market.

12 68 MARKET FORCES (.) UNIT Unit Content: Market Types.1 Market Types efine Market and Give New Zealand Examples escribe emand in ifferent Market Types Classify Markets by the Level of Competition escribe a Monopsony Identify and escribe Price Marketing Strategies Identify and escribe Non-price Marketing Strategies Identify the Implications of Market Structure on Producers and Consumers 1 (poor) Understanding 2 (good) checklist: I have... done a mind-map of the main ideas (before and after I ve done the work) tried (and marked) all of the exercises watched the online videos of this work read the notes and summarised the key ideas in the margins of the pages made (or downloaded from quizlet) flashcards of the key ideas and definitions relevant current events and examples: relevant events and examples for this unit are: I didn t really get the following parts of this unit and I m going to ask to help me with this

MARKET FORCES (.) 69 tips 4 assignments This standard is internally assessed, and so you may be required to do an assignment.

clarify what you need to do Read the assignment task carefully AN the marking schedule to see what you must hand in to achieve this standard. Check whether you must hand in... original data?

check when you need to do the work Most assignments have a number of deadlines.

13 MARKET FORCES (.) 69 tips 4 assignments This standard is internally assessed, and so you may be required to do an assignment. If you do, follow the guidelines below to help you learn the material and get the grade (excellence) that you deserve. clarify what you need to do Read the assignment task carefully AN the marking schedule to see what you must hand in to achieve this standard. Check whether you must hand in... original data? graphs and/or diagrams? a typed essay or a video podcast? Talk to your teacher about this. Check your understanding with other students in your class. check when you need to do the work Most assignments have a number of deadlines. These may include: initial hypothesis / proposal first (or final) draft final assignment The early deadlines are a chance to check with your teacher that you re on the right track... so use them. Even if you don t think you ve got it right, ALWAYS hand something in to get feedback. ask questions You may need to gather some data or information, and some theory. AT THE START... think about what information you will need. Who will you ask, or where will you read for this information? What questions will you ask? If you get this part of the assignment right at the start, the rest will be much easier. set a timeline... and stick to it! raw a timeline of what you need to do - by when. Put this into your diary... your cellphone... on your bedroom roof... wherever you re going to see it - and do something about it! on t... don t... just don t leave it all until two nights before the final hand-in (submission) date. final check Try to finish early (two weeks is ideal). Then put your assignment aside and don t look at it for a few days. Then read it right through and check that (1) it makes sense and (2) meets the assessment criteria. NOW GET GOING!

14 tips 4 teachers number of concepts There are six concepts listed in the standard: marginal utility and demand diminishing returns (increasing costs) and supply elasticity of demand (price, income and cross) elasticity of supply market types (NOT including perfect competition or monopoly) the price mechanism and resource allocation between markets You must assess at least two of these. Students must NOT study perfectly competitive or monopolistic markets. style of assessment You can assess this standard in a variety of ways: test(s) portfolio of work assignment The important thing is that you can provide evidence of students understanding of two or more micro-economic concepts... as per the standard. data / information Students must use data or information with their analysis. The standard does not state whether it is primary or secondary, or that students must collect it... i.e. you may provide it. If students do collect data, it should be genuine and relevant data. In this situation, students should provide a bibliography so that you can check the validity of the data (and help them learn this skill for further study). However, a bibiliogaphy is not a requirement of the standard. achievement criteria achieve Students must show that they understand two or more micro-economic concepts - using BOTH models AN data (information). achieve with merit Students understanding must be at a higher level ( in-depth ) than for an achieved grade. achieve with excellence Same as merit... AN Students must identify and JUSTIFY the implications of these concepts for consumers, producers OR the government... i.e. at least one of these groups. For example, students might discuss the impact of elasticity on government tax revenue, the benefits of the price mechanism on consumers and producers, or the effects of (lack ) of competition on producers and consumers.

Tutor2u Economics Essay Plans Summer 2002

Tutor2u Economics Essay Plans Summer 2002 Microeconomics Revision Essay (7) Perfect Competition and Monopoly (a) Explain why perfect competition might be expected to result in an allocation of resources which is both productively and allocatively