4.2. MARKET STRUCTURE &PERFECT COMPETITION
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When we discuss market structure, we are concerned with the competition levels in the market. We need to look beyond just the market share of existing firms and instead look at these factors:
- The number of firms and market share of the firm (on both a national and international level). This can be done by looking at concentration ratios which are explained at the end of this section
- How vertically integrated the industry is? Do companies in this industry own the process before or after them in the production process? An example would be a carpenter business owning a forest where they source the wood and a shop who sells the furniture that they make
- How differentiated the products are?
- The turn over of customers, which is how many customers will switch supplier if the market conditions change
- What are the costs in the industry like? In some industries it can be possible for economies of scale to exist, which mean that the larger the size of the firm, the lower the unit cost is. This lower unit cost can then potentially be passed onto the consumers through lower prices.
Perfect Competition
Perfect competition is a theoretical market structure where competition is at its greatest possibly level. It does not exist in reality but commodity markets are fairly close. We can use the criteria for perfect competition to determine how efficient and effective a market is. Perfect competition has these criteria:
Perfect competition is a theoretical market structure where competition is at its greatest possibly level. It does not exist in reality but commodity markets are fairly close. We can use the criteria for perfect competition to determine how efficient and effective a market is. Perfect competition has these criteria:
- Perfect information – for both producers and consumers, which allows them to make rational decisions whereby consumers maximise utility and producers maximise profit. Perfect information about profits, costs and production processes can be available to new firms who may potentially enter into that industry.
- No barriers to entry or exit – firms can move in and out of an industry as they please.
- Homogenous goods – all goods are the same meaning that consumers do not care whether they buy a good from one firm or another.
- All firms are price takers – they cannot influence the price in the market. The price is determined by supply and demand. No matter how many units the firm produces, they will sell all of them for the given price.
- Many firms each with a small share in the market
Not Perfectly Competitive Markets
We can have various different types of markets that are not perfect competition such as:
We can have various different types of markets that are not perfect competition such as:
- A pure monopoly is where there is a single seller. It is rare for this to occur unless the industry was previously owned by the state, such as utility companies in the past and the London Underground.
- A working monopoly. A firm that has over 25% of the total sales in that market.
- An oligopoly. An industry that is dominated by a few large firms.
- A duopoly. A market that is dominated by two firms.
- A local monopoly. A village shop.