Chapter 12: Market Structure

Question 1

What is a ‘market’?

Answer 1

A market is any arrangement which enables transaction of a good or service to take place.

• A transaction can take place in different ways, e.g. through the internet, by mail etc. Hence, a market may not involve a physical location.

Question 2

What is market structure?

Answer 2

A market structure describes a typical form of market with specific features and competitive behaviour.

Question 3

What are the different forms of market structure?

Answer 3

Perfect competition (does not exist in the real world)

Imperfect competition

• Monopoly
• Oligopoly
• Monopolistic competition

Question 4

What are the features of ‘perfect competition’ market structure?

Answer 4

Number of buyers:

• Many buyers who are small and not associated with each other

Number of seller(s):

• Many so that no one seller can influence the market price individually

Products’ information:

• Perfect information

Nature of products:

• Homogeneous

Ease of entry (firms):

• Free entry of firms

Price taker/Price searchers:

• Sellers are price takers (due to price information and homogeneous products)

Competitions between sellers:

• Price competitions (due to scarcity), but no non-price competiton

Question 5

What are the features of ‘monopoly’ market structure?

Answer 5

Number of buyers:

• Many buyers who are small and not associated with each other

Number of seller(s):

• One (no close substitutes), e.g. MTR co. Ltd

Products’ information:

• Imperfect information

Nature of products:

• Homogeneous or Heterogeneous

Ease of entry (firms):

• No entry of firms (Entry barriers exist)

Price taker/Price searchers:

• Sellers are price searchers

Competitions between sellers:

• Both price and non-price competitions can exist

Question 6

What are the features of ‘oligopoly’ market structure?

Answer 6

Number of buyers:

• Many buyers who are small and not associated with each other

Number of seller(s):

• Few dominant sellers among all sellers, e.g. supermarkets, gasoline stations

Products’ information:

• Imperfect information

Nature of products:

• Homogeneous or Heterogeneous

Ease of entry (firms):

• Difficult entry

Price taker/Price searchers:

• Sellers are price searchers

Competitions between sellers:

• Both price and non-price competitions can exist

Question 7

What are the features of ‘oligopoly’ market structure?

Answer 7

Number of buyers:

• Many buyers who are small and not associated with each other

Number of seller(s):

• Many, e.g. bakery shops, restaurants, boutiques

Products’ information:

• Imperfect information

Nature of products:

• Heterogeneous

Ease of entry (firms):

• Free entry of firms

Price taker/Price searchers:

• Sellers are price searchers

Competitions between sellers:

• Both price and non-price competitions can exist

Question 8

What does ‘perfect information’ mean?

When does ‘imperfect information’ occur?

Answer 8

Perfect information means all buyers and sellers in the market know all the information related to a product, which include its price, quality and availability. In other words, it does not incur any cost to obtain information about this market.

When the availability of market information is NOT perfect, then it is called ‘imperfect information’.

Question 9

What are the differences between ‘homogeneous products’ and ‘heterogeneous products’?

Answer 9

If the sellers in a market are selling homogeneous products

• They are selling goods or services which are completely identical in nature.

If the sellers in a market are selling heterogeneous products

• They are selling goods or services which are differentiated, e.g. in terms of quality, packing advertising etc.

Question 10

What are the differences between ‘price takers’ and ‘price searchers’?

Answer 10

If the sellers are price takers,

• Individual seller cannot influence the market price since there are many sellers and one’s output is so small that any change in an individual supply cannot affect the market price on its own.
• The market price is determined by the whole market demand and supply together. All sellers just have to sell at the same market price.

If the sellers are price searchers,

• Individual seller can influence the market price and they can search and set their own prices.
• There can be different prices set by different sellers in the market. (Price dispersion)

Question 11

What is ‘non-price competition’?

Answer 11

Non-price method serve as the criteria in competition, e.g. sellers compete by posting advertisement, improving quality etc.

Question 12

Why is it difficult to find a perfectly competitive market in reality?

Answer 12

In reality, it is difficult to find a perfectly competitive market because perfect information seldom exists.

Question 13

Which features help explain the absence of non-price competition in perfect competiton (perfectly competitive market)?

Answer 13

Perfect information + Homogeneous products

Question 14

Therefore, in reality, why do we see advertising more common in certain market (e.g. property market) than in other markets (e.g. stock market)?

Refer to Card 13

Answer 14

1. There is less information available.
2. The products of the market are more heterogeneous.

Question 15

Why can firms monopolize the market?

Answer 15

The main source of monopoly power is entry barriers. They include the following:

• Natural monopoly
• Legal entrance restrictions (Patents 專利權, copyrights 版權 and franchise 特許經銷權)
• Government ownership and provision
• Essential resources or techniques

Question 16

What is ‘natural monopoly’?

Answer 16

Monopoly resulting from the continually decreasing average cost due to high set-up cost and internal economies of scale.

Elaboration:

• When an industry requires a high set-up cost, the firm with a larger scale can spread the total cost over a larger output and enjoy a lower average cost. With this advantage, it can drive out all competitors by undercutting others’ prices and become the monopolist.

Examples:

• Electricity supply, Railway service in HK

Question 17

What is ‘legal entrance restriction’ (patents, copyrights and franchise)?

Answer 17

Sole ownership of patents or copyrights allows inventors and authors to have the exclusive right to produce their products.

Elaboration:

• To prevent waste of resources under fierce competition, the government may grant a firm sole ownership of the franchise. It is called franchised monoplist.

Examples:

• Ngong Ping 360 Cable Car

Question 18

What does ‘government ownership and provision’ mean?

Answer 18

Many public services are solely supplied by government where as private firms cannot enter the markets.

Examples:

• Water supply

Question 19

What does ‘essential resources or techniques’ mean?

Answer 19

If only one firm owns the essential resources or techniques required for producing a good, the firm will become a monopolist.

Examples:

• De Beers owning major diamond mines

Question 20

Does a monopolist still have to face competition?

Answer 20

Even in the case of monopoly, where this is one seller only, competition still exists.

Due to the following reasons:

1. It has to compete with producers of substitutes for customers.
2. It has to compete with producers for inputs of production (e.g. labour, capital, etc.)
3. It has to compete with others for the right (i.e. the monopoly right) to be the sole seller in the market.

Examples of 3:

• To maintain its monopoly status, it has to prevent newcomers from entering the market and to avoid being taken over by other firms.

Question 21

Explain the interdepency of oligopoly.

Answer 21

Oligopolists are highly independent. The marketing strategies (such as discount, promotion) of oligopolists affect one another, i.e. mutual influence of behaviour.

Examples:

• Similar marketing strategies adopted by Park’n shop and welcome supermarkets
• TVB Jade and Viu TV (中年好聲音 vs 全民造星)

Question 22

Explain the price rigidity of oligopoly.

Answer 22

Prices tend to be rigid
If one oligopolist cuts its price, other may follow so as to keep their market shares. This may result in a price war. Consequently, sellers may suffer a huge drop in profit at then end.

• Hence, oligopolists are cautious about changing prices and prices tend to be rigid.

Examples:

• The newspaper industry entered into a price war in 1995 when Apple Daily was first published and sold at $2 each and undercut prices of all newspaper in Hong Kong. Other publishers were forced to follow and some ended up shutting down from the business.