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A2 Economics ± May 2009

— at is market structure?

‡ Market structure is t e organisational and ot er

c aracteristics of a market
‡ —e tend to focus on t ose c aracteristics of a
market w ic affect t e degree of competition
between firms and t eir pricing decisions
‡ Traditionally we emp asise:
1. T e number and size distribution of buyers and sellers
2. T e existence or absence of barriers to entry and exit
ptructural c aracteristics of a market

‡ T e number of firms and t e extent of overseas competition (e.g. from

wit in t e single market or in global markets)
‡ T e market s are of t e largest businesses (measured by t e
concentration ratio)
‡ T e nature of costs in t e s ort and long run
‡ T e degree to w ic an industry is vertically integrated up and down t e
supply c ain (e.g. forward and backward vertical integration)
‡ T e extent of product differentiation / product branding
‡ Price and cross price elasticity of demand
‡ T e number and size of buyers of t e industry¶s product
‡ T e turnover of customers from one seller to anot er (also called
³market c urn´) ± t is is affected by brand loyalty and t e effects of
advertising and marketing
vefining t e market

‡ Market and t e industry are terms often used inter-c angeably

‡ But«««««««««««
± If we define a market in a narrow sense, it is likely t at t ere will
be fewer producers
‡ E.g. t e market for snooker tables or t e market for air travel
to Jersey
± A broader definition of t e market often gives us more c oice
‡ E.g. t e air transport industry
‡ T e market for sports footwear
± vefining t e market is important w en we try to measure t e
concentration ratio and t e extent to w ic a market is dominated
by one or a few large producers
T e nature of costs in a market

‡ Entry costs into a market

± Capital costs will vary from industry to industry
± E.g. a natural monopoly
‡ punk costs
± T ese are costs t at are not recoverable
‡ E.g. advertising and marketing
‡ vepreciation of capital equipment
± Hig sunk costs makes a market less contestable
‡ Natural cost advantages
± Location advantages e.g. close to ports, access to c eaper labour
± Owners ip of important raw materials
± Control of t e supply c ain t roug vertical integration
Product omogeneity or differentiation

‡ Homogeneous goods
± Essentially t e same p ysical c aracteristics
± Associated wit perfect competition
± Potential for different grades
‡ E.g. steel, cement, coal, fres fruit
‡ Non- omogeneous goods
± Products differentiated from t eir competitors
± Branding
± Packaging and marketing
‡ ptrong product differentiation and brand loyalty allows firms to c arge
ig er prices
± vemand become less price elastic
± Reduction in t e cross-price elasticity of demand
T e Conduct / Be aviour of Firms

‡ How does 


 affect pricing, output and ot er decisions of

businesses wit in t e market
‡ Are t ere dominant firms?
‡ Is t ere evidence of anti-competitive be aviour?
± Collusive pricing agreements
± Predatory pricing?
± Vertical restraint?
‡ How important is non-price competition in t e market?
‡ Is t ere 
 between firms?
‡ vo businesses be ave strategically to retain profits by deterring t e
entry of new competitors in t e long run?
‡ Be aware t at t e market structure will affect t e be aviour of firms
Performance Indicators

‡ Trends in real price levels over time

‡ pize of business profits ± evidence of excess profits?
‡ How muc spending on researc and development ± does it lead to
a fast pace of tec nological advance and innovation?
‡ How muc spending on uman capital, does it lead to rising labour
productivity in t e industry?
‡ voes t e conduct of firms give rise to efficient outcomes?
1. Allocative efficiency
2. Productive efficiency
3. vynamic efficiency
Has t e telecoms industry ac ieved efficiency?

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T e usual causal view

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Conduct and market structure

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Price and non-price competition?

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Performance and c anging markets

         

       
    

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Performance can affect market structure

‡ Performance can affect structure

± Top performing firms will gain market s are at expense of rivals
± T is gives t em more market power
± Fine line between market dominance and economic efficiency?
‡ Market conduct affects structure
± E.g. decisions about researc and development and marketing
‡ ptrategic be aviour of firms especially in oligopoly makes it
difficult to rely on t e structure conduct performance model
‡ T e t eory of contestable markets stresses t e dynamic
nature of competition especially w en a market is open