Market Structure - Applied Economics (11

grade 11

1. Market Structure:
A Framework for
Understanding Competition

2. Objectives:
At the end of the lesson, the students will be
able to:
1.Explain market structures (perfect
competition, monopoly, oligopoly, and
monopolistic competition)

3. What is a Market?

4. A market is a place or system where
buyers and sellers interact to exchange
goods and services. It's a fundamental
concept in economics and plays a
crucial role in shaping our daily lives.

5. Key Components of a Market
➢Buyers: Individuals or entities who
demand goods or services.
➢Sellers:Individuals or entities who
supply goods or services.
➢Goods and Services: Products or
actions that are traded in the market.
➢Price: The agreed upon value of the
exchange between buyers and sellers.

6. Importance of Markets
Markets are essential for economic growth and societal
well-being. They provide a framework for:
➢Consumer Choice: Consumers have the freedom to
choose from a variety of goods and services.
➢Economic Efficiency: Resources are allocated
efficiently to meet consumer demand.
➢Innovation: Competition encourages businesses to
develop new products and services.
➢Job Creation: Markets create jobs for workers in
various industries.

7. Markets are dynamic systems that facilitate
the exchange of goods and services, driving
economic activity and shaping our lives.
Understanding how markets function is
crucial for making informed decisions as
consumers, producers, and citizens.

8. The Market Structure

9. What is a Market structure?

10. Market structure refers to the way different
industries are categorized and differentiated
based on the level and nature of competition
for goods and services.
It helps us understand how firms behave and
interact within a particular market,
influencing factors like pricing, innovation,
and overall market efficiency.

11. Key Factors Determining Market Structure:
➢Number of Firms: The number of firms
operating in the market, ranging from
many firms in perfectly competitive
markets to just one firm in a monopoly.
➢Product Differentiation: Whether the
products offered by firms are
homogeneous (identical) or
differentiated (unique).

12. ➢Barriers to Entry: The ease or difficulty
for new firms to enter the market,
including factors like high startup costs,
regulations, or control over essential
resources.
➢Information Flow: The availability and
transparency of information about
prices, products, and production costs
for both buyers and sellers.

13. Types of Market Structure
1.Perfect Competition
2.Monopoly
3.Oligopoly
4.Monopolistic Competition

14. 1. Perfect Competition: The Idealized Model
Perfect competition is a theoretical market
structure that serves as a benchmark for
understanding how markets function. It represents
an idealized scenario where numerous small firms
compete against each other, offering identical
products to a large number of buyers. In this
framework, no single firm can influence market
prices, leading to a highly efficient allocation of
resources.

15. Key Characteristics:
➢Many buyers and sellers: The presence of numerous
buyers and sellers ensures that no single entity has
significant market power. This prevents any individual
firm from dictating prices or influencing market
outcomes.
➢Homogeneous products: All firms produce identical
products, making it impossible for any firm to
differentiate itself based on product features. This
eliminates the possibility of price premiums or brand
loyalty.

16. ➢Free entry and exit: Firms can easily enter or exit
the market without facing significant barriers, such
as high start-up costs or regulatory hurdles. This
ensures that the market is constantly adjusting to
changes in demand and supply.
➢Perfect information: All buyers and sellers have
complete and accurate information about prices,
products, and market conditions. This ensures that
everyone is making informed decisions and that
there are no information asymmetries.

17. ➢Zero Transaction Costs: There are no costs
associated with buying or selling goods in the
market. This eliminates any barriers to trade and
allows for seamless transactions.

18. Implications for Firms in Perfect Competition:
1. Price Takers: Firms have no control over the market
price and must accept the prevailing price to sell their
products. This means that firms are simply price takers,
rather than price setters.
2. Zero Economic Profit in the Long Run: Due to free
entry and exit, firms in perfect competition can only earn
normal profits in the long run. Any temporary economic
profits will attract new entrants, driving prices down and
eliminating excess profits.

19. 3. Focus on Efficiency:Firms must operate efficiently to
minimize costs and maximize output, as they have
limited ability to influence prices. This leads to a strong
incentive for firms to adopt the most cost-effective
production methods.

20. Market Outcomes of Perfect Competition:
1. Efficient Allocation of Resources: Perfect competition
leads to the most efficient allocation of resources, as
firms produce at the lowest possible cost and
consumers pay the lowest possible price. This
maximizes overall societal welfare.
2. High Consumer Welfare: Consumers benefit from low
prices and a wide range of choices. The competitive
environment ensures that firms are constantly striving to
offer the best possible value to consumers.

21. 3. Innovation May Be Limited: Due to the lack of profit
incentives, firms in perfect competition may have limited
motivation to invest in research and development. The
focus on minimizing costs and maximizing output may
lead to a lack of investment in new technologies or
product improvements.

22. Limitations of Perfect Competition:
While perfect competition is a valuable theoretical
model, it is important to note that it is rarely observed in
real-world markets. Most industries have some degree
of imperfect competition, where firms have some
market power and can influence prices.
➢Imperfect Information: Consumers often lack
complete information about products and prices,
leading to imperfect market outcomes.

23. ➢Transaction Costs: Real-world markets involve
transaction costs, such as transportation and
communication, which can affect market efficiency.
➢Differentiated Products: Many industries offer
differentiated products, meaning that consumers
perceive differences between products, even if they
are technically similar.

24. Despite its limitations, perfect competition serves as a
valuable benchmark for understanding market
dynamics and evaluating the efficiency of resource
allocation. It highlights the importance of competition in
promoting consumer welfare and driving innovation.

25. 2. Monopoly: The Sole Supplier in the Market
A monopoly is a market structure where a single
firm dominates the entire market for a specific
product or service, with no close substitutes
available. This gives the monopolist significant
market power, allowing them to control prices and
output levels without facing direct competition.

26. Key Characteristics:
➢Single Seller:The defining characteristic of a
monopoly is the presence of only one seller in the
market. This means the monopolist is the sole
supplier of the good or service.
➢No Close Substitutes: Consumers have limited
choices, as there are no readily available
alternatives to the monopolist's product. This makes
the demand for the monopolist's product relatively
inelastic, meaning consumers are less sensitive to
price changes.

27. ➢Barriers to Entry: Significant barriers prevent
other firms from entering the market and
competing with the monopolist. These barriers
can be natural, such as high fixed costs or
control of essential resources, or they can be
created by the monopolist through legal means
like patents, copyrights, or exclusive licenses.

28. How Monopolies Operate:
➢Price Makers: Unlike firms in competitive
markets, monopolists are not price takers. They
have the power to set prices for their products,
as they are the sole supplier. However, the
monopolist still faces a downward-sloping
demand curve, meaning they cannot charge an
arbitrarily high price without losing customers.

29. ➢Profit Maximization: Monopolists aim to
maximize their profits by producing the quantity
of output where marginal revenue (MR) equals
marginal cost (MC). This is the same profit-
maximizing rule that applies to firms in other
market structures.

30. ➢Price Discrimination:In some cases,
monopolists can engage in price discrimination,
charging different prices to different groups of
consumers based on their willingness to pay.
This can further increase the monopolist's
profits.

31. Consequences of Monopoly:
▪Higher Prices and Lower Output: Compared to
a perfectly competitive market, monopolies
typically charge higher prices and produce less
output. This is because they can restrict supply
to create artificial scarcity and extract higher
profits.

32. ▪Reduced Consumer Welfare: Consumers suffer from
higher prices and fewer choices. They may also face
lower quality products or services, as the monopolist
has less incentive to innovate or improve its
offerings.
▪Potential for Deadweight Loss: The reduced output
and higher prices associated with monopolies create
a deadweight loss (burden), representing a loss of
overall societal welfare. This occurs because the
monopolist restricts output below the socially optimal
level, where marginal cost equals price.

33. Types of Monopolies:
➢Natural Monopoly: This occurs when the costs of
production are lower for a single firm to serve the
entire market than for multiple firms to compete.
This is often the case for industries with high fixed
costs, such as utilities (electricity, water, gas).
➢Government-Granted Monopoly: Governments
sometimes grant exclusive rights to a single firm to
operate in a particular market, often for industries
deemed essential or to encourage innovation. This
can be seen in patents, copyrights, and licenses.

34. Regulation of Monopolies:
Due to the potential negative consequences of
monopolies, governments often regulate them to protect
consumers and promote competition. This can involve:
➢Price Controls: Setting maximum prices for goods
and services to prevent excessive price gouging.
➢Antitrust Laws: Prohibiting anti-competitive practices
like mergers and acquisitions that could lead to
monopolies.
➢Public Ownership: In some cases, governments may
take over ownership of natural monopolies to ensure
fair pricing and service provision.

35. Examples of Businesses with Monopoly Power:
1. Legal Monopolies:
➢Pharmaceutical Companies: Pharmaceutical companies
often hold patents on new drugs, giving them exclusive
rights to manufacture and sell those drugs for a certain
period. This creates a legal monopoly, allowing them to
set prices without direct competition. For example,
Pfizer held a monopoly on the COVID-19 vaccine.
➢Software Companies: Software companies can also
establish legal monopolies through copyright and
licensing agreements. Microsoft was once accused of
monopolizing the operating system market with its
Windows software.

36. 2. Natural Monopolies:
➢Utility Companies: Utility companies, such as electricity, gas,
and water providers, often operate as natural monopolies. The
high cost of building and maintaining infrastructure makes it
impractical for multiple companies to compete in the same
geographic area. For example, Exelon is the largest energy
provider in the United States, holding significant market power
in several states.
➢Railroad Companies: In some regions, railroad companies can
hold a natural monopoly due to the extensive infrastructure
required for rail lines. For example, Union Pacific Railroad is a
major railroad company in the US, controlling a significant
portion of the rail network.

37. 3. State Monopolies:
National Postal Services: Many countries have
government-run postal services, such as the United States
Postal Service (USPS), which often hold a monopoly on
mail delivery. These monopolies are typically regulated to
ensure fair pricing and service.
4. Unnatural Monopolies:
Companies with Exclusive Resources: Companies that
control unique resources, like rare earth minerals or
specific oil reserves, can create unnatural monopolies. For
example, De Beers historically held a near-monopoly on
diamond production.

38. 3. Oligopoly: A Market Dominated by a Few
An oligopoly is a market structure where a small
number of firms dominate the industry,
controlling a significant portion of the market
share. These firms have substantial influence
over prices and output, often leading to
restricted competition and higher profit margins.

39. Key Characteristics of an Oligopoly
➢Few Sellers and Many Buyers: A defining feature of
oligopolies is the presence of a limited number of firms,
while the number of buyers remains relatively large. This
creates a situation where each firm's actions have a
significant impact on the market and its competitors.
➢Interdependence: The actions of one firm in an oligopoly
directly affect the decisions and outcomes of other firms.
Firms must constantly monitor and anticipate the moves
of their rivals, leading to a dynamic and strategic
relationship.

40. ➢High Barriers to Entry: Oligopolies often have high
barriers to entry, making it difficult for new firms to join the
market. These barriers can include:
✓Economies of scale: Existing firms may have already
achieved significant economies of scale, making it
challenging for newcomers to compete on cost.
✓Government regulations: Licenses, permits, or other
regulatory hurdles can restrict entry.
✓Brand loyalty: Established brands may have strong
consumer loyalty, making it difficult for new players to
gain market share.

41. ➢Product Differentiation: Products in an oligopoly can be
either homogeneous (identical) or differentiated (unique). In
a pure oligopoly, firms produce identical products, while in
a differentiated oligopoly, firms offer distinct products or
services.
➢Price Rigidity: Oligopolies tend to exhibit price rigidity,
meaning prices are relatively stable and resistant to
change. Firms are hesitant to lower prices, fearing a price
war, and raising prices could lead to losing market share to
competitors.

42. ➢Non-Price Competition: To compete, firms in an oligopoly
often engage in non-price competition such as advertising,
product differentiation, or innovation. This allows them to
differentiate their offerings and attract customers without
resorting to price wars.

43. Types of Oligopolies
➢Collusive Oligopolies: Firms in a collusive oligopoly
cooperate to set prices and output levels, often through
formal agreements or implied understandings. This can
lead to higher prices and reduced consumer choice.
➢Non-Collusive Oligopolies: Firms in a non-collusive
oligopoly compete with each other, but their actions are
still interdependent. They may engage in strategies such
as price leadership or strategic pricing to gain an
advantage.

44. Advantages and Disadvantages of Oligopolies
Advantages:
➢Price Stability: Oligopolies can lead to more stable
prices, as firms are hesitant to engage in price wars.
➢Innovation: Firms in an oligopoly may have the
resources and incentives to invest in research and
development, leading to new products and technologies.
➢Efficiency: Oligopolies can achieve economies of scale,
leading to lower production costs and potentially lower
prices for consumers.

45. Disadvantages:
➢Reduced Competition: Oligopolies can limit competition,
leading to higher prices and fewer choices for
consumers.
➢Collusion: Collusive oligopolies can engage in price-
fixing or other anti-competitive practices that harm
consumers.
➢Barriers to Entry: High barriers to entry can stifle
innovation and prevent new firms from entering the
market, potentially hindering economic growth.

46. Examples of Oligopoly Business in Philippines with Differentiated
Products
1. Telecommunications Industry:
Globe Telecom, PLDT (Smart), and DITO Telecommunity
2. Beer Industry:
San Miguel Brewery (SMB) and Asia Brewery
3. Fast Food Industry:
Jollibee, McDonald's, KFC, and Burger King
4. Retail Industry:
SM Supermalls, Ayala Malls, and Robinsons Malls
5. Automotive Industry:
Toyota, Honda, Mitsubishi, and Ford
6. Banking Industry:
BPI, Metrobank, and Union Bank

47. 4. Monopolistic Competition: A Blend of
Competition and Differentiation
Monopolistic competition is a market structure that
blends elements of both perfect competition and
monopoly, creating a unique and dynamic market
environment. It's a common market structure
found in many industries, particularly those with a
large number of firms offering differentiated
products or services.

48. Key Characteristics:
➢Low Barriers to Entry: New firms can enter the market
relatively easily, meaning there are few obstacles to
starting a business in the industry. This keeps competition
healthy and prevents any single firm from gaining too
much power.
➢Price Makers: Firms have some control over their prices,
but they are not price setters like monopolies. They must
consider the prices of their competitors. If a restaurant
raises prices too high, customers might go elsewhere,
highlighting the importance of price sensitivity in this
market structure.

49. ➢Many Sellers: There are numerous firms competing in the
market, each offering a slightly differentiated product or
service. This means there is a high degree of competition,
but no single firm has a dominant market share.
➢Product Differentiation: Firms strive to distinguish their
offerings from competitors through branding, quality,
features, design, or customer service. This creates a
perceived difference in the minds of consumers, even if
the products are fundamentally similar. Think of the vast
array of coffee shops, each trying to stand out with unique
blends, atmosphere, or loyalty programs.

50. ➢Non-Price Competition: Firms compete not only on price
but also through advertising, branding, and other
marketing strategies to differentiate themselves and
attract customers. This is where the "monopolistic" aspect
comes in, as firms try to create a perceived monopoly
over their specific product or service.

51. Advantages:
➢Product Variety and Choice: Consumers benefit from a wide
array of products and services, as firms strive to offer unique
options to attract customers. This fosters innovation and
caters to diverse preferences.
➢Non-Price Competition: Firms engage in advertising, branding,
and other marketing strategies to differentiate themselves,
leading to increased consumer awareness and potentially
higher quality products.
➢Responsive to Consumer Preferences: Firms are more
responsive to consumer preferences and demands due to the
competitive nature of the market. This encourages innovation
and adaptation to changing market trends.

52. Disadvantages:
➢Higher Prices: Compared to perfect competition, monopolistic
competition can lead to slightly higher prices due to product
differentiation and some market power. While not as high as
monopolies, these prices may still be considered inefficient.
➢Inefficiency: Firms may not fully exploit economies of scale
due to limited market power, leading to higher production costs
and potentially less efficient resource allocation. Additionally,
resources spent on advertising and marketing can be
considered wasteful.
➢Potential for Excess Capacity: Firms may operate at less than
optimal production levels, leading to excess capacity and
potentially underutilized resources. This can be attributed to
the need for product differentiation and the pursuit of market
share.

53. How can we apply our
understanding of the market
structures in real life?

54. For Businesses:
1. Competitive Strategy: Knowing the market
structure helps businesses develop effective
competitive strategies. In a perfectly competitive
market, firms focus on efficiency and cost
reduction. In monopolistic competition, they
emphasize product differentiation and marketing.
Oligopolies require strategic pricing and marketing
to maintain market share. Monopolies have more
freedom in pricing but face regulatory scrutiny.

55. 2. Pricing Decisions: Market structure
dictates how much pricing power a firm has.
In perfect competition, firms are price takers.
In monopolistic competition, they have some
pricing power but must consider competitors.
Oligopolies often engage in price wars or
collusion. Monopolies have the most pricing
power but face regulatory limitations.

56. 3. Investment Decisions: Understanding
market structure helps businesses make
informed investment decisions. Perfect
competition may offer lower returns but less
risk. Monopolies may offer higher returns but
more risk. Oligopolies require careful
analysis of competitor behavior.

57. 4. Market Entry and Exit: Businesses
consider barriers to entry and exit when
deciding whether to enter a market or exit an
existing one. Perfect competition has low
barriers to entry, while monopolies have high
barriers. Oligopolies have intermediate
barriers, often determined by factors like
economies of scale and brand recognition.

58. For Consumers:
1. Choice and Prices: Consumers benefit from
understanding market structures. Perfect competition offers
lower prices and more choices. Monopolistic competition
provides variety but may lead to higher prices. Oligopolies
can lead to limited choices and potentially higher prices.
Monopolies offer limited choices and often higher prices.
2. Consumer Power: Consumers can use their
understanding of market structures to leverage their power.
In perfect competition, consumers have more bargaining
power due to numerous choices. In monopolies,
consumers have less power. Consumers can advocate for
regulations to protect their interests in markets with limited
competition.

59. For Policymakers:
•Regulation and Antitrust: Policymakers use their understanding
of market structures to regulate industries and prevent anti-
competitive practices. They may introduce regulations to
promote competition in oligopolies and monopolies to protect
consumers. They may also implement antitrust laws to prevent
mergers and acquisitions that could stifle competition.
•Economic Policy: Policymakers use market structure analysis to
inform economic policy decisions. They may implement policies
to encourage competition in certain sectors or provide support
to businesses in highly competitive markets. They may also use
market structure analysis to predict the impact of economic
shocks on different industries.

60. In conclusion, our understanding of market
structures is a powerful tool for navigating
the complexities of the modern economy. It
helps businesses make strategic decisions,
empowers consumers, and guides
policymakers in shaping a fair and efficient
marketplace.