Market Structure
7 important questions on Market Structure
A comparison of perfect competition and monopoly
• There might be less choice under monopoly since firms do not have to update their products continually in order to stay in business.
• There is less incentive to innovate under monopoly, since the monopolist is subject to less competition.
Porter’s model says that the structure of an industry and the ability of firms in that industry to act strategically depend upon the relative strengths of five forces:
- Current competition (market structure)
- Potential competition (threat of new entrants)
- The threat of substitute products
- The power of buyers
- The power of suppliers
Current competition (market structure)
- If they are successful there will be a change in the level of current competition and therefore in market structure.
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Potential competition (or threat of new entry)
- Degree of competition, affects the behavior of firms.
Barriers to entry and barriers to exit
o Barrier to exit: Exit barriers are those that prevent or deter exit from an industry; they are mainly related to the cost of leaving the industry.
o Strategic behavior: where innocent barriers to entry or exit are low, potential competition will be high and firms within such a market are faced with the choice of accepting the situation or deliberately erecting some barriers.
Measuring the degree of actual competition in the market
o This measures the percentage of value added, total output or employment that is produced by a stated number of the largest firms in the industry.
o The common numbers are three, four or five.
o The five-firm concentration ratio measures the percentage of employment or output accounted for by the five largest firms in the industry.
o The common numbers are three or five.
The five-firm concentration ratio measures the percentage of employment or output accounted for by the five largest firms in the industry
Reasons for high concentration
o Firms in every industry will face differing average cost curves and therefore market structures will be different.
o As the MES of production continues to increase, average costs eventually start to rise due to diseconomies of scale, which are mostly attributed to managerial inefficiencies.
o The strength of the five forces
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