MAC601 Market Structures November 19 Michelle Cecilio

MARKET STRUCTURES
An Introduction, November 19, 2011
Friday, May 04, 2012
Prepared by: Michelle Cecilio
Scope of the report

Market Structures A definition
Overview of the different market
structures and their examples
NOTE:
The following topics will be discussed in detail in another report.
Perfect Competition Monopoly
Market Structures
The interconnected characteristics of a market, such as the number and relative strength of buyers and sellers and degree of collusion among them, level and forms of competition, extent of product differentiation, and ease of entry into and exit from the market.
Simple Illustration
# of Market Players
Supply
MARKET
Barriers to entry
Price control & Market power

Friday, May 04, 2012 Prepared by: Michelle Cecilio 5
Factors affecting market structures

Number of firms/market players and
Competition Price control and Market Power Supply Barriers to entry
4 Basic Types
1. Perfect Competition 2. Oligopoly 3. Monopoly 4. Imperfect Competition
Illustration
PERFECT COMPETITION
In the perfect or pure competition market, there are a large number of firms each producing the same product (as called a standardized or homogeneous product). Since the number of firms is very large, no one firm can influence the market price, thus each firm has no market power and each is a price taker. We also assume that there is perfect information, meaning everyone knows what price is being charged in all markets. The barriers to entry are low, so it is easy for other firms to get into or out of the market.
PERFECT COMPETITION
1. Large number of market players
2. Standardized or homogenous products 3. No influence or control on pricing of
products 4. Availability of information 5. Barriers to entry are low

Examples of Perfect Competition

Agriculture products market (farm
produce/staple goods like grains and veggies) ex: Wheat, Corn Consumer goods and durables
Note perfect competition is an absolute concept. Examples provided are those that are closest/best illustrate this structure.
OLIGOPOLY
Market form in which a market or industry is dominated by a small number of sellers. There are significant barriers to entry which limit the number of firms that can enter the market often due to the cost structure of the industry. Since there are only a few firms, the market power of a firm depends on the actions of the other firms in the industry.
OLIGOPOLY
Industry dominated by small number of large firms High barriers to entry (high ind. Costs) Products could be highly differentiated branding vs. homogenous Price stability within the market Potential for collusion Abnormal profits High degree of interdependence between firms
Measuring Oligopoly
Concentration ratio the proportion of market share accounted for by top X number of firms: E.g. 5 firm CR of 80% - means top 5 five firms account for 80% of market share 3 firm CR of 72% - top 3 firms account for 72% of market share
Examples - Oligopoly
1. Wireless Communications PLDT (now
owns 51.55% of Digitel) and Globe Telecom 2. Oil OPEC; Caltex, Petron, Sea Oil, Shell 3. Air transportation PAL, Cebu Pacific, Zest Air, AirPhil Express 4. Broadcasting ABS-CBN, GMA and TV5
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QUICK QUESTION
Do you agree that the Philippine Banking industry is an Oligopoly? Please comment.
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MONOPOLY
A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products.
MONOPOLY
1. There is a single seller.
2. There are no close substitutes for
the firms product unique product (control on quantity) 3. There are barriers to entry (high costs) 4. Market power (price maker)
Examples
Public Utilities: 1. Power Distribution MERALCO, VECO (geographic) 2. Water MCWD Public Railway: 1. MRT 2. LRT
IMPERFECT COMPETITION
Competitive situation in any market where the conditions necessary for perfect competition are not satisfied. It is a market structure that does not meet the conditions of perfect competition.
IMPERFECT COMPETITION
1. Monopoly
2. Oligopoly
3. Monopolistic Competition
4. Monopsony 5. Oligopsony Friday, May 04, 2012
Monopsony is a state in which demand comes from
one source. If there is only one customer for a certain good, that customer has a monopsony in the market for that good Similar to an oligopoly (few sellers), this is a market in
which there are only a few large buyers for a product or service. This allows the buyers to exert a great deal of control over the sellers and can effectively drive down prices.
Prepared by: Michelle Cecilio 21
MONOPOLISTIC COMPETITION
Monopolistic competition is imperfect competition where many competing producers sell products that are differentiated from one another (that is, the products are substitutes but, because of differences such as branding, not exactly alike)
Major characteristics
1. Product differentiation (branding)
2. Many firms 3. Free entry and exit in the long run 4. Independent decision making 5. Market Power (due to differentiation)
6. Buyers and Sellers have perfect
information
MONPOLISTIC COMPETITION
Each firm may have a tiny monopoly
because of the differentiation of their product Firm has some control over price
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Examples
Restaurants: (Japanese vs. American; Pasta vs. Grilled products) Rai-Rai Ken vs. Joeds Lutong Hapon (Japanese Carenderia) Donuts: Krispy Kreme vs. Dunkin Donuts Professions: Assurance (Audit and Consultancy) Sycip Gorres Velayo & Co., vs. small practitioners (based on professional fees) Bakery/Pastry Shop: Pan de Manila vs. Julies
Lets identify the appropriate market structure for the following: 1. Cable companies 2. Call center industry in Cebu City 3. Power transmission company (Transco) 4. Power generation companies in Cebu City 5. Hospitals in Cebu City
REFERENCES
http://tutor2u.net/economics/revision-notes/a2-micro
market-structures-summary.html http://www.bized.co.uk http://www.businessdictionary.com/definition/marketstructure.html http://www.philequity.net/uploadedfile/20110613163427146 _Philequity%20Corner%20%20The%20Philippine%20Banking%20Giants.pdf http://courses.byui.edu/ECON_150/ECON_150_Presentatio ns/Lesson_07.htm#Section_01_Link_01 http://economics.about.com/od/termsbeginningwithm/g/ monopsony.htm Png, Ivan. Managerial Economics Asia Pacific Edition. 2005
Thank you!
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ADDITIONAL READING MATERIALS BEYOND THIS POINT
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Advantages of Perfect Competitiion

High degree of competition helps
allocate resources to most efficient use Price = marginal costs Normal profit made in the long run Firms operate at maximum efficiency Consumers benefit
What happens in a competitive environment?

New idea/Innovation firm makes
short term abnormal profit Other firms enter the industry to take advantage of abnormal profit Supply increases price falls Long run normal profit made Choice for consumer
MONOPOLY
Pure monopoly industry is the firm! Actual monopoly where firm has
>25% market share Natural Monopoly high fixed costs gas, electricity, water, telecommunications, rail
Advantages of Monopoly
May be appropriate if natural
monopoly Encourages R&D Encourages innovation Development of some products not likely without some guarantee of monopoly in production Economies of scale can be gained consumer may benefit
MONOPOLY contd
High barriers to entry
Firm controls price OR output/supply Abnormal profits in long run Possibility of price discrimination Consumer choice limited Prices in excess of MC
Disadvantages of Monopoly
Exploitation of consumer higher
prices Potential for supply to be limited less choice Potential for inefficiency
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Barriers to entry into market

Monopolies derive their market power from barriers to entry circumstances that prevent or greatly impede a potential competitor's ability to compete in a market. There are three major types of barriers to entry; economic, legal and deliberate.[4] Economic barriers: Economic barriers include economies of scale, capital requirements, cost advantages and technological superiority.[5] Economies of scale: Monopolies are characterised by decreasing costs for a relatively large range of production.[6] Decreasing costs coupled with large initial costs give monopolies an advantage over would-be competitors. Monopolies are often in a position to reduce prices below a new entrant's operating costs and thereby prevent them from continuing to compete.[6] Furthermore, the size of the industry relative to the minimum efficient scale may limit the number of companies that can effectively compete within the industry. If for example the industry is large enough to support one company of minimum efficient scale then other companies entering the industry will operate at a size that is less than MES, meaning that these companies cannot produce at an average cost that is competitive with the dominant company. Finally, if long-term average cost is constantly decreasing, the least cost method to provide a good or service is by a single company.[7] Capital requirements: Production processes that require large investments of capital, or large research and development costs or substantial sunk costs limit the number of companies in an industry.[8] Large fixed costs also make it difficult for a small company to enter an industry and expand.[9] Technological superiority: A monopoly may be better able to acquire, integrate and use the best possible technology in producing its goods while entrants do not have the size or finances to use the best available technology.[6] One large company can sometimes produce goods cheaper than several small companies.[10] No substitute goods: A monopoly sells a good for which there is no close substitute. The absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to extract positive profits. Friday, May 04, 2012 Prepared by: Michelle Cecilio 36
Barriers to entry into market

Control of natural resources: A prime source of monopoly power is the control of resources that are critical to the production of a final good. Network externalities: The use of a product by a person can affect the value of that product to other people. This is the network effect. There is a direct relationship between the proportion of people using a product and the demand for that product. In other words the more people who are using a product the greater the probability of any individual starting to use the product. This effect accounts for fads and fashion trends.[11] It also can play a crucial role in the development or acquisition of market power. The most famous current example is the market dominance of the Microsoft operating system in personal computers. Legal barriers: Legal rights can provide opportunity to monopolise the market of a good. Intellectual property rights, including patents and copyrights, give a monopolist exclusive control of the production and selling of certain goods. Property rights may give a company exclusive control of the materials necessary to produce a good. Deliberate actions: A company wanting to monopolise a market may engage in various types of deliberate action to exclude competitors or eliminate competition. Such actions include collusion, lobbying governmental authorities, and force (see anti-competitive practices). In addition to barriers to entry and competition, barriers to exit may be a source of market power. Barriers to exit are market conditions that make it difficult or expensive for a company to end its involvement with a market. Great liquidation costs are a primary barrier for exiting.[12] Market exit and shutdown are separate events. The decision whether to shut down or operate is not affected by exit barriers. A company will shut down if price falls below minimum average variable costs.
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DUOPOLY
Industry dominated by two large firms Possibility of price leader emerging
rival will follow price leaders pricing decisions High barriers to entry Abnormal profits likely
Is RP banking industry oligopolistic?
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Is RP banking industry oligopolistic? Contd
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Is RP banking industry oligopolistic? Contd.

As of 1Q2011, MBT is the biggest bank in the country in terms of Assets and Equity. BDO is a very close 2nd in terms of Assets, but it still is the countrys biggest lender. Though BPI is behind MBT and BDO in terms of size, it has the highest Market Capitalization among the 3. Collectively, MBT, BDO and BPI are referred to as the Big 3. They offer a comprehensive suite of products to their customers and are often market share leaders in the businesses that they enter.

MAC601 Market Structures November 19 Michelle Cecilio

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MARKET STRUCTURES

An Introduction, November 19, 2011

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Scope of the report

structures and their examples

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Perfect Competition Monopoly

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Price control & Market power

Factors affecting market structures

Competition Price control and Market Power Supply Barriers to entry

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Friday, May 04, 2012

Prepared by: Michelle Cecilio

products 4. Availability of information 5. Barriers to entry are low

Examples of Perfect Competition

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Monopsony is a state in which demand comes from

6. Buyers and Sellers have perfect

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Friday, May 04, 2012

Friday, May 04, 2012

Prepared by: Michelle Cecilio

ADDITIONAL READING MATERIALS BEYOND THIS POINT

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Advantages of Perfect Competitiion

Friday, May 04, 2012

What happens in a competitive environment?

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Barriers to entry into market

Barriers to entry into market

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Is RP banking industry oligopolistic?

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Is RP banking industry oligopolistic? Contd

Friday, May 04, 2012

Prepared by: Michelle Cecilio

Is RP banking industry oligopolistic? Contd.

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