Different Market Structures (Copy)

7.6 Different Market Structures

7.6.1 Perfect Competition and Imperfect Competition

Perfect Competition

• Firms: Many buyers & sellers.
• Products: Homogeneous.
• Entry/Exit: Free.
• Information: Perfect knowledge.
• Price control: None – firms are price takers.

Imperfect Competition Types:

• Monopoly: Single seller, unique product, high entry barriers.
• Monopolistic Competition: Many sellers, differentiated products, low entry barriers.
• Oligopoly: Few large sellers, interdependent decisions, high barriers.
• Natural Monopoly: One firm can supply the whole market at a lower cost than multiple firms due to economies of scale.

Table – Market Structure Snapshot:

7.6.2 Structure of Markets – Key Factors

• Number of Buyers/Sellers: Determines competitiveness.
• Product Differentiation: Degree to which goods differ in quality, branding.
• Freedom of Entry: Affects long-term profits.
• Availability of Information: Perfect vs imperfect knowledge influences efficiency.

7.6.3 Barriers to Entry and Exit

Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Economics Full Scale Course

7.6.4 Performance of Firms in Different Market Structures

Revenues & Revenue Curves:

• Perfect competition: AR = MR = Price (horizontal).
• Monopoly/Monopolistic competition/Oligopoly: Downward-sloping AR, MR falls faster.

Output & Profits:

• Short run: All structures can make supernormal or subnormal profit.
• Long run:
  • Perfect competition: Only normal profit (due to free entry).
  • Monopoly/Oligopoly: Supernormal profit possible (due to barriers).
  • Monopolistic competition: Normal profit (due to entry of new firms).

Shutdown Price:

• Short run: Price < AVC → shut down.
• Long run: Price < ATC → exit market.

Supply Curve in Perfect Competition:

• Portion of MC curve above AVC in short run; above ATC in long run.

Efficiency & X-Inefficiency:

• Perfect competition: Productively & allocatively efficient in long run.
• Monopoly: Potential X-inefficiency due to lack of competitive pressure.

Contestable Markets:

• Features: Low barriers, threat of entry disciplines prices/profits.
• Implication: Even monopoly may price close to competitive level if contestable.

Price vs Non-Price Competition:

• Price: Discounts, penetration pricing.
• Non-price: Advertising, product differentiation, loyalty schemes.

Collusion & Prisoner’s Dilemma in Oligopoly:

• Firms may collude to fix prices → higher joint profits.
• Two-player pay-off matrix: Shows incentive to cheat for higher short-term gain but risk of mutual loss if both cheat.

Example Pay-Off Matrix:

7.6.5 Concentration Ratio

• Definition: Percentage of total market sales controlled by the largest n firms.
• Formula: Concentration Ratio = (Sales of top n firms ÷ Total market sales) × 100.

Example:

• Top 4 firms sell $80m out of $100m total sales → Concentration ratio = (80 ÷ 100) × 100 = 80%.

Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Economics Full Scale Course