Market Structure

A.3.1] Perfect Market (Perfect Competition)

Characteristics:

• Large number of buyers and sellers: No single participant can influence the market price.
• Homogeneous products: All products are identical across sellers.
• Perfect information: All market participants have full and equal access to information.
• No barriers to entry or exit: Firms can freely enter or exit the market.
• Perfect mobility of factors of production: Resources can move freely between industries.
• Price takers: Firms must accept the market price.

Key Facts:

• Market price is determined by supply and demand.
• Firms earn normal profit in the long run.
• Example: Agricultural markets (e.g., wheat, rice).

Differences from Other Markets:

Important Terms:

• Perfect Competition: A market structure where all firms are price takers.
• Normal Profit: Profit that equals the opportunity cost of capital.

Exam Focus:

• Characteristics of perfect market.
• Examples of perfect markets.
• Differences between perfect market and other market structures.

A.3.2] Monopolistic Control

Characteristics:

• Monopolistic control refers to a situation where a single firm controls a significant portion of the market.
• Market power: The firm can influence the price of its product.
• Product differentiation: Products are slightly different from competitors.
• Barriers to entry: High entry barriers prevent new firms from entering the market.
• Price searcher: Firms set prices based on demand and cost.

Key Facts:

• Monopolistic control is a transitional stage between perfect competition and monopoly.
• Examples: Dominant firms in industries like telecommunications or software.

Important Terms:

• Monopolistic Control: A firm with significant but not complete control over the market.
• Price Searcher: A firm that searches for the optimal price and output level.

Exam Focus:

• Definition and characteristics of monopolistic control.
• Difference between monopolistic control and monopoly.

A.3.3] Monopoly

Characteristics:

• Single seller: Only one firm produces the product.
• Unique product: No close substitutes available.
• High barriers to entry: Legal, economic, or technological barriers prevent new entrants.
• Price maker: The firm sets the price.
• Perfect information: Not required; the firm has complete control over pricing.
• Price discrimination: The firm may charge different prices to different consumers.

Key Facts:

• Examples: Public utilities (e.g., electricity, water), patented medicines.
• Long-run profit: Monopolies can earn supernormal profits.
• Deadweight loss: Monopolies lead to inefficiency in resource allocation.

Differences from Other Markets:

Important Terms:

• Monopoly: A market structure where a single seller controls the entire market.
• Price Discrimination: Charging different prices to different consumers for the same product.

Exam Focus:

• Characteristics of monopoly.
• Examples of monopolies.
• Impact of monopoly on market efficiency.

A.3

Characteristics:

• Few sellers: A small number of firms dominate the market.
• Interdependent decisions: Firms are aware of each other’s actions and react accordingly.
• Product differentiation: Products may be similar or differentiated.
• Barriers to entry: High entry barriers due to economies of scale or legal restrictions.
• Non-price competition: Firms compete through advertising, branding, and innovation.

Key Facts:

• Examples: Automobile industry, telecom sector.
• Collusion: Firms may collude to fix prices or output.
• Game theory: Used to analyze strategic interactions between firms.

Differences from Other Markets:

Important Terms:

• Oligopoly: A market structure with a small number of dominant firms.
• Game Theory: A framework for analyzing strategic interactions between rational decision-makers.

Exam Focus:

• Characteristics of oligopoly.
• Examples of oligopolistic industries.
• Role of game theory in oligopoly analysis.

A.3.5] Duopoly

Characteristics:

• Two sellers: Only two firms dominate the market.
• Interdependent decisions: Each firm’s actions directly affect the other.
• Product differentiation: Products may be identical or differentiated.
• Barriers to entry: High entry barriers prevent new firms from entering.
• Collusion or competition: Firms may collude (e.g., price fixing) or compete (e.g., price wars).

Key Facts:

• Examples: Coca-Cola and Pepsi, Microsoft and Apple.
• Nash Equilibrium: A situation where each firm chooses the best strategy given the other’s choice.
• Cartel: A group of firms that collude to maximize joint profits.

Differences from Other Markets:

Important Terms:

• Duopoly: A market structure with two dominant firms.
• Nash Equilibrium: A stable state in which each player’s strategy is optimal given the others’ strategies.
• Cartel: A group of firms that collude to control prices and output.

Exam Focus:

• Characteristics of duopoly.
• Examples of duopolistic markets.
• Concept of Nash equilibrium and cartel formation.