Maket Structure

8/3/2019 Maket Structure

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MARKET STRUCTURE

GROUP 1

1.Nguyn L Hong V2.Phm nh Thi3.V Cng Thu4.Nguyn Phc Hng5.V Hong Long

5.1 DEFINING THE MARKET& THE INDUSTRY:

5. MARK ET STRUCTURE

MARKET

A market is a nexus interaction between buyers

and sellers

MARKET

Example : Street market , Stock market , Stock

market .


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MARKETINDUSTRY

An industry is a firm or group of firms

DISTINGUISHING DISTINGUISHING

The geographical extend of the market:


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DISTINGUISHING

Summarize :

Marker : Who are you selling to ?

Industry :What are you selling ?

5.2 WHAT IS MARKET STRUCTURE

?

Market structure refer to the nature, level and extent of

competition in an industry or market. This structure is theresult of actions and interactions of individuals and

institutions including firms, business organizations

It refers to factors such as: the number of firms that

compete, their concentration, cost, demand and

technological conditions, and ease of entry and exit

condition.

The traditional model of market

structureThere are 3 main elements:

The degree of seller (and buyer) concentration.

The degree of product differentiation within individual

market.

The condition entry and exit.

Measure and definition ofconcentration


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The n firm concentration : refers to the cumulated market share of n leading firms in the industry, n is

between 4 and 8. is computed as:

=

CRn 0: the industry is composed a very large

number of firms, and the less concentrated is the

industry.

CRn 1 four or fewer firms produce all of an

industrys output, the more concentrated is the

industry and there is very little competition in

the industry.

is popular because its limited data

requirements (size of market and market share

of largest firms). But it doesnt inform the

relative importance of firms within a particular

industry.

The Herfindarlh index : H.

The Gini coefficient : GC.The Gini coefficient is a statistical measure base upon the Lorenz curve.

= +

The entropy index : E.

The entropy index measure the degree of uncertainty associate with a particular

market structure.

= .1

When all market shares are equal, = :

= .1 .log = log


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Theoretical Market Number 1 Theoretical Market Number 2

Number ofCompanies

Market Number ofCompanies

Market

Share E ntropy Herfindahl Share Entropy Herfindahl

1 10.0% 0.2303 0.01 1 50.0% 0.346574 0.25

2 10.0% 0.2303 0.01 2 5.6% 0.160576 0.00

3 10.0% 0.2303 0.01 3 5.6% 0.160576 0.00

4 10.0% 0.2303 0.01 4 5.6% 0.160576 0.00

5 10.0% 0.2303 0.01 5 5.6% 0.160576 0.00

6 10.0% 0.2303 0.01 6 5.6% 0.160576 0.00

7 10.0% 0.2303 0.01 7 5.6% 0.160576 0.00

8 10.0% 0.2303 0.01 8 5.6% 0.160576 0.00

9 10.0% 0.2303 0.01 9 5.6% 0.160576 0.00

10 10.0% 0.2303 0.01 10 5.6% 0.160576 0.00

Theil's Entropy: 2.3026 Theil's Entropy: 1.791759

Herfindahl (*10,000): 1,000 Herfindahl (*10,000): 2,778

The Lerner index: L.

The Lerner index is i n fact a measure of monopoly power.

=

5.3/ Market structures:

In economics , market structure(also known as thenumber of firms producing identical products).

Perfect competitionMonopolistic competitionOligopoly DuopolyMonopoly.

a. Perfect competition is a t heoretical market

structure that features unlimited contestability (or

no barriers to entry ), an unlimited number of

producers and consumers, and a perfectly

elastic demand curve .

Characteristics:

Infinite buyers and sellers

Zero entry and exit barriers

Perfect information Homogeneous products

Perfect factor mobility

Zero transaction costs

Profit maximization

Non-increasing returns to scale


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* Infinite buyers and sellers Infinite consumers with

the willingness and ability to buy the product at a

certain price, and infinite producers with the

willingness and ability to supply the product at a

certain price.

* Zero entry and exit barriers It is relatively easy for a

business to enter or exit in a perfectly competitive

market.

* Perfect information - Prices and quality of

products are assumed to be known to all

consumers and producers

Homogeneous products The characteristics ofany given market good or service do not varyacross suppliers.


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Perfect factor mobility - In the long run factors ofproduction are perfectly mobile allowing free longterm adjustments to changing market conditions.

Zero transaction costs - Buyers and sellers incur nocosts in making an exchange (perfect mobility).

Profit maximization - Firms aim to sell where marginal

costs meet marginal revenue, where they generate themost profit.

Non-increasing returns to scale - Non-increasing returns to scale ensure that there aresufficient firms in the industry

EX:

Financial markets stock exchange, currency markets,bond markets?

Agriculture?

Results:

TR=P*Q

MR=MC=P

b. Monopolistic competition : also called competitive

market, where there are a large number of firms, each

having a small proportion of the market share and

slightly differentiated products.

Characteristics:

Product differentiation:

new designs

advertising

Branding

Many firms

Free entry and exit in the longrun

Independent decision making

Market Power

Buyers and Sellers haveperfect information.


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EX: Restaurant, professions-solicitors, etc,building firms-

planterers, plumbers..

RESULTS:

c. Monopoly , where there is only one provider of a

product or service

Characteristics:

Profit Maximiser: Maximizes profit.

Price Maker: Decides the price of the good or product to be

sold. High Barriers to Entry: Other sellers are unable to enter the

market of the monopoly.

Single seller: In a monopoly there is one seller of the good which produces

all the output.Therefore, the whole market is being served by a single

company, and for practical pur poses, the company is the same as the

industry.

Price Discrimination: A monopolist can change the price and q uality of the

product. He sells more quantities charging less pr ice for the product in a

very elastic market and sells less quantities charging high price in a less

elastic market.

Imperfect Information of the Market: Sellers & Buyers dont have perfect

info. on price & quality of goods

No Close Substitutes :Buyers are difficult to findanother goods to satisfy the same want.

EX: high fixed costs gas, electricity, water,telecommunications, rail....


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Results:

6. STRUCTURE ANDSTRATEGY: OLIGOPOLY

OLIGOPOLY

In oligopoly

Firms operate in ways influenced by

their expectations of the reactions of

other firms

Price Output

OLIGOPOLY

Do not refer explicitly to numbers of firms,

product differentiation or barriers of entry

Become main focus of modern industrial

economics

Base on behavioural and strategic factors (more

than structural ones)


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OLIGOPOLY

Only the firm in oligopoly is capable of developing

proper trategy (within the confines of theory)

OLIGOPOLY

In perfect competition

All the firms have the plans to maximize

their profits

OLIGOPOLY

In monopolistic competition

Taking a decision is

limited whether and

how to differentiate

their products

OLIGOPOLYIn monopoly

Has only one decision: how to set either

price or quantity in such a way as to

maximize profits by getting MR equal to

MC


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OLIGOPOLY

So, what is the definition of strategy?

Not only the decision what price to

charge.But also the

decision as to

whether to compete

on the basis of price

at all

6.1.COURNOTS DUOPOLY

COURNOTS DUOPOLY


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COURNOTS DUOPOLY

Not co-operation : = = 10, = 10

= = 100

Co-operation : = 15, = 15

= = 2 = 112,5

6.2.BERTRANDS MODEL

6.3. Product differentiationThe basis for differentiation stratergics is a

degree of differentiation between the products of

firm 1 and 2

If there is complete differentiation , each of the

firms becomes a monopolist, the price will be stillhigher.

It has been te subject of attention both in

theoretical mode-building and in empirical test of

product differenttiation.

/ /


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Theoretical model-building

Cellini in 2004 on product differentiation

Hoenig in 2003 on horizontal differentiation and

strategic complementarity

Belleflamme and Toulemonder in 2003 on product

differentiation in vertical oligopolies

Empirical test of product differentiation

Goldberg and Verboven in 2001: Examine theEuropean car industry.

6.4. Differentiated reactions

A kink (point A) is a

equilibrium point which

the oligopolist considers

the possible responses to

an increase or decrease in

price.

The idea of differentiated

reactions can also be

applied to different firms

in a particular industry

responding to the same

event.

6.5. Stackelberg leadership

Heinrich von Stackelberg is a German economist

In 1934, he brought some refinement to oligopoli theory

In the Stackelberg duopoly moel, it is assumed that Firm 2

follows the Cournot behavioural assumption. It observes Firm1s output and tries to determine a profit-maximizing level of

output.

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The market demand curve assumes: p = f(Q) = a-bQ

Where Q = q1 + q2, firm 2s reaction function is thus:

q2 = (a c2)/2b 0.5 q1

The dominant firms profit is: 1 = pq1 cq1

Firm 1 will maximize profit where: d/dq1 = 0

If c1=c2=c : q1= (a c) /2b and q2 = (a c) / 4b

Therefore, we have: p = (a + 3c)/4

6.6. COLLUSIVE DUOPOLY

Collosive : Two or more firms agree on the

price , the quantities to be produced , andthe spatial division of the market .

6.7. COLLUSIVE DUOPOLY

Example :

6.8. CONJECTURAL VARIATIONS

Conjectural variation (CV) : A proposed

approach to the problem of how

equilibrium is reached under oligopoly

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THANKS FOR YOUR ATTENTION!

Maket Structure

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