Market Structures

NODE 01

Market Structure

↔

• Characteristics influencing how firms compete.
• Number of firms & buyers.
• Nature of product & info availability.
• Barriers to entry/exit.

NODE 02

Perfect Competition

• Many buyers & sellers.
• Homogeneous product.
• Free entry and exit.
• Perfect information.

NODE 03

Price Taker

• Firm cannot raise price without losing all sales.
• Market forces determine price.
• Firm's Price = Market Price.

NODE 04

Revenue under PC

• TR = P × Q.
• AR = P.
• MR = P.
• Therefore: P = AR = MR (Horizontal Line).

NODE 05

Profit Max in PC

• Standard condition: MR = MC.
• Since MR = P in PC...
• Firm produces where P = MC.

NODE 06

Short-Run Outcomes

• Supernormal Profit: TR > TC.
• Normal Profit: TR = TC.
• Loss: TR < TC (but TR > TVC to stay open).

NODE 07

Long-Run PC

↓

↓

• Free entry/exit erodes extreme profits/losses.
• Profit → New firms enter → Supply ↑ → Price ↓.
• Loss → Firms exit → Supply ↓ → Price ↑.
• Results in Normal Profit only.

NODE 08

Monopoly

• One dominant/sole supplier.
• Strong barriers to entry.
• Significant price-setting power.
• No close substitutes.

NODE 09

Sources of Monopoly Power

• Legal barriers (patents, licences).
• Control over essential resources.
• High entry costs & Network effects.
• Economies of scale.

NODE 10

Natural Monopoly

AC ↓

• One producer is most cost-efficient.
• Due to substantial economies of scale.
• High fixed costs + declining average cost.
• E.g., Utilities (water, grid).

NODE 11

Monopolist's Demand

• Faces the entire market demand curve.
• Must lower price to sell more.
• Therefore: MR < Price.

NODE 12

Monopoly Profit Max

• Decision rule: MR = MC (finds Quantity).
• Uses Demand curve to find Price.
• MR = MC → Q → Demand Curve → P.

NODE 13

Monopoly vs PC

VS

• PC: Many firms, price taker, P = MR.
• Monopoly: One firm, price setter, P > MR.

NODE 14

Price Discrimination

• Same product sold at different prices.
• Requires market power & separated groups.
• Must prevent resale (arbitrage).
• E.g., Student discounts, airline tickets.

NODE 15

Monopolistic Competition

• Many firms + Differentiated products.
• Products are substitutes but not identical.
• E.g., Restaurants, clothing brands, salons.

NODE 16

Product Differentiation

• Quality, design, branding, location.
• Packaging, customer service, advertising.
• Gives each firm some degree of market power.

NODE 17

Non-Price Competition

BRAND PERK ★

• Competition through features, not just price.
• Advertising, quality, loyalty programs.
• Crucial in Monopolistic Comp and Oligopoly.

NODE 18

Oligopoly

• Dominated by a small number of significant firms.
• Substantial barriers to entry.
• Central idea: Strategic interdependence.

NODE 19

Strategic Interdependence

REACTS →

• My decision depends on your decision.
• Firm A cuts price → Firm B must decide to match or hold.
• Fundamentally different from simple models.

NODE 20

Game Theory Connection

WIN,WIN

LOSE,WIN

WIN,LOSE

LOSE,LOSE

• Framework: Players → Strategies → Payoffs → Outcome.
• Models price wars, advertising, entry decisions.

NODE 21

Cooperation & Collusion

• Collusion: Coordinating decisions (prices/output).
• Cartel: Formal/informal group acting as one.
• Usually restricted by competition law.

NODE 22

Price War

• Repeated retaliatory price reductions.
• A cuts → B cuts → A cuts again.
• Consumers benefit temporarily, firms lose margins.

NODE 23

Market Power

• Ability to influence market price/conditions.
• Sources: Few competitors, brand strength.
• Differentiation, entry barriers, network effects.

NODE 24

Barriers to Entry

• Make it difficult for new firms to enter.
• Structural: Economies of scale, capital costs.
• Legal: Patents, licences.
• Strategic: Aggressive incumbent behaviour.

NODE 25

Barriers to Exit

• Difficult/costly to leave a market.
• Long-term contracts, specialised assets.
• High closure costs. Influences downturn behaviour.

NODE 26

Diff. & Market Power

• Differentiation → Brand loyalty.
• Lowers substitutability → Greater market power.
• Grants individual pricing discretion.

NODE 27

Role of Substitutes

• Availability of substitutes constrains market power.
• If easy to switch: Price ↑ → Demand falls sharply.
• Weak substitutes = Stronger pricing power.

NODE 28

Market Concentration

• How much activity is controlled by few firms.
• Many small firms = Low concentration.
• Few large firms = High concentration.

NODE 29

Vectors of Competition

PRICE

AD

QUAL

INNOV

• Price, Quantity, Quality.
• Innovation, Advertising, Service.
• Form depends on the market structure.

NODE 30

Consumer/Producer Outcomes

PRICEVARIES

QUALITYVARIES

• Structure influences price, qty, quality, innovation.
• Determines profits and efficiency.
• Not just classification—explains real outcomes.

NODE 31

Productive Efficiency

• Producing at the lowest attainable average cost.
• Perfect competition is the benchmark.

NODE 32

Allocative Efficiency

• Producing quantity where Price = Marginal Cost.
• Value to consumers = Marginal resource cost.
• Monopoly (P > MC) underproduces relative to efficient level.

NODE 33

Deadweight Loss

• Lost potential surplus due to market power.
• Mutually beneficial transactions do not occur.
• Bridge to welfare economics and government intervention.

NODE 34

Government Intervention

• Intervenes when market power harms welfare.
• Competition law, anti-monopoly regulation.
• Price regulation, merger control.

NODE 35

Structure Comparison

PC

MC

OLI

MON

• Firms: Very many → Many → Few → One.
• Product: Homogeneous → Diff → Diff/Homo → Unique.
• Power: Very low → Some → Strategic → High.

NODE 36

The Four-Face Logic

• Perfect Comp: Many firms, price taking.
• Monopolistic Comp: Many firms, differentiation.
• Oligopoly: Few firms, strategic interdependence.
• Monopoly: One firm, strong market power.

NODE 37

The Master Chain

• Market Structure → Barriers → Competition.
• Degree of Competition → Market Power.
• Firm's Price/Output Decision → Profit/Welfare.
• Market Power/Failure → Govt Policy.