Essential Revision - Market Structures

This model looks at the key features of market structures

Then how market structure can influence the actual conduct of competing businesses

Then the impact that business conduct has on key performance measurements including economic and social welfare and different types of efficiency

Market Structure

Market structure is the organisational and other characteristics of a market

We tend to focus on those characteristics of a market which affect the degree of competition between firms and their pricing decisions

Key aspects include:

• Number of firms / suppliers
• Size distribution of firms
• Market share / market power of leading firms
• Nature of costs in both short and long run including economies of scale
• Existence (or otherwise) of sunk costs
• Extent of product differentiation
• Extent to which firms have monopsony power

Market Conduct

This refers to the day-to-day decisions taken by businesses in a given market or industry:

Key aspects include:

• Business objectives:
• Profit maximisation
• Non-profit maximising theories
• Pricing strategies (these are closely linked to objectives)
• Scope for collusive behaviour between sellers
• Interdependent decision-making
• Importance of the threat of entry in a contestable market
• Limit and predatory pricing
• Different types of non-price competition
• Research and development / attitudes to risk-taking

Market Performance

This refers to some of the metrics by which we might judge the outcomes of market activity. Key aspects include:

• Trends in real prices for consumers over time
• Scale and persistence of profits – including supernormal profit
• Productivity growth and other performance metrics
• Does a market outcome lead to economic efficiency?
• Allocative efficiency
• Productive efficiency
• Dynamic efficiency
• Social efficiency