Market Structures - What you need to know for Q2.

I know lots of pupils stumble over the characteristics of the different market structures,  perfect competition, imperfect competition, oligopoly and monopoly. 

I have found that this table can be effective when answering questions as you just need to remember the left column, and then apply your knowledge about each Market type to relevant points 

Most years, you are asked to draw a labelled diagram of one of the market structures and explain the equilibrium position. Below I have put together diagrams with the long run positions for each of the market structures.

In Perfect Competition the firm is a price taker, and is met with a fixed horizontal demand curve.  The firm is selling at its lowest point on the average cost curve (most efficient point) which along with the no barriers to entry ensures that customers are not exploited. 

In Imperfect Competition the firm is met with a regular downward sloping demand curve (AR).

 The firm will usually try to maximise profits and hence produce the quantity where MC=MR. This is not the best point for the consumer as the firm is not getting the full potential benefit from economies of scale (lowest point of ac).

In Oligopoly there are only a few firms. Each firm will react to what others do hence the kinked demand curve. If firm a raises the price above the equilibrium other firms will keep their price stable and hence take some of firm a's market share. If firm a reduces their price below the market equilibrium price, others will follow them down and all of the firms market share will remain constant.

In Monopoly there is only one firm and the firm faces a downward sloping demand curve. The firm can choose the price of the good or the quantity made available for sale but not both. Monopolists will usually produce the quantity where MC =MR as this is the most profitable point.  

**** Exam Analysis ****

Market Structures comes up every year and is usually question 2 in the long questions. There is nearly always a short question as well, so that means it could account for as much as 22% of your exam in June. 

Beware of questions which make a statement such as "European short haul airlines operate under conditions of Imperfect competition or Oligopoly.... as the statement will often be false and you must agree or disagree as appropriate. The best way to answer such a question is to apply the table above and think does the European short haul airline apply to the market structure in the question. 

Sample Mock Questions

Monopolies, are they all bad?

The term monopoly carries many bad connotations, but are they all bad?

Next time you get a bus during the middle of the day in Dublin, be thankful for monopolies. Dublin Bus are a government sanctioned monopoly. Having the monopoly means no competition, which can be bad, but the Government can ensure that the monopolist provide certain services which the Government deem socially beneficial which include providing bus services on routes and at times which are non profit making. In general monopolies do not produce at the lowest point on their average cost curve and are not as efficient as they could be if they were in a competitive market.

How and why do monopolies exist?

There are a number of ways for monopolies to exist, each of the following types of monopoly have sufficient barriers to entry such that no firm can successfully enter the market and compete in a meaningful way.
We already saw Government sanctioned. The government provide one license to one company (Government run or not) to provide a service, they do not allow another service provider.

If a company have total control of a primary resource which is used in the production of a good, they can monopolize the market by being the sole producer. This is also true if a company hold a Patent or Copyright on a good or service, this is a legal document allowing no company to provide the same product or service, this is to protect a companies investment in research and development.

If a company is sufficiently large it can keep others out of the market due to Economies of Scale, as they can make it impossible to compete with them without a huge investment beyond the capability of any competing organisation. If a company has Technological Superiority or skills that are not possible to match or recreate, they can make it impossible to compete with them, in a similar way to the way Barcelona play football, many can try and copy their style but without players like Messi, Iniesta, Xavi and Fabregas, it is not possible to do it with the same success.

Can Monopolists charge what they want and sell as many as they like?

Monopolists can charge as much as they want or they can set the number of goods they will make available for sale, but they cannot do both. If a monopolists sets a price, then they hand control over to the market to decide how many items they will sell. The same is true when the monopolists sets the quantity available, they will sell this quantity at the price set by the market. 

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Advantages of Monopolies

• Monopolies can benefit from economies of scale and can sometimes produce at lower prices
• Single production can avoid duplication of resources. (No need for multiple factories)
• Employment can be more secure as the firm can deal with changes in demand as its earning Super Normal Profits.

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Disadvantages of Monopolies

• Monopolists normally do not produce at the lowest point of AC, so they are potentially wasteful.
• Monopolies earning S N P show that consumers are being exploited. 
• No choice of products/services. 
• Lazy suppliers, no incentive to be innovative as consumers have no choice. 
• Monopolists can sometimes be inefficient as they control price or quantity supplied.
• Monopolists can practice price discrimination and further exploit customers