1

2

MA

RK

ET

ST

RU

CT

UR

E

Number of sellers : Many/Several/One

Nature of Products: Homogenous/Heterogeneous (Differentiated)

Ease of entry and exit: Easy/Restricted/Difficult

Availability of market information: Perfect/Imperfect

Influence in market price: Price taker / Price searcher

5 Conditions

3

Perfect CompetitionPerfectly Competitive Market

Is an ideal market structure in the eyes of the economists.

But there is NO real-world example .

In this market, consumers will enjoy the lowest possible price.

4

Features of a

Perfectly Competitive Market

Many sellers and buyersMany sellers and buyers Individual sellers have no influence on the marketIndividual sellers have no influence on the market Homogeneous goodsHomogeneous goods Free entry and exitFree entry and exit Perfect informationPerfect information

5

Q1. Many sellers and buyers?

Q2. Individual sellers have no influence on the market?

Q3. Homogeneous goods?

Q4. Free entry and exit?

Q5. Perfect information?

Yes

No

No

No

No

Can vegetable stalls be classified as operating in a perfectly competitive market?

Can vegetable stalls be classified as operating in a perfectly competitive market?

How about Stock Market?6

Some behaviour of a perfectly competitive firm

Under perfectly competitive market, sellers have to Under perfectly competitive market, sellers have to sell at a price according to that established in the sell at a price according to that established in the market. They are the market. They are the price takerprice taker..

No individual seller engages in No individual seller engages in non-pricenon-price competitioncompetition such as advertising and package such as advertising and package design. This is because the goods they sell are the design. This is because the goods they sell are the same to the consumers.same to the consumers.

7

MonopolyMonopolyexists when there is

only one seller that has no close substitute.

8

Features of a MonopolyFeatures of a Monopoly

There is no entry in a monopoly and there

is only one producer in the market.

9

The goods or services sold by The goods or services sold by monopolistmonopolist may be may be homogeneoushomogeneous or or heterogeneousheterogeneous..

10

11

There is There is no perfectno perfect information in the information in the market. Neither sellers nor consumers market. Neither sellers nor consumers are fully aware of the cost, price, quality are fully aware of the cost, price, quality and quantity of the goods traded.and quantity of the goods traded.

Cost?

Price?

Quality?

Quantity?

Can “Eastern Cross Harbour Tunnel” be classified as operating in a monopoly?

Q1. No entry to the market and

there is only one producer?No

Q2. Services sold are homogeneous or heterogeneous? Yes

Q.3 No perfect information? Yes

How about water supplies in Hong Kong?

12

2 2 ProminentProminent Behaviour of a MonopolistBehaviour of a Monopolist 2 2 ProminentProminent Behaviour of a MonopolistBehaviour of a Monopolist A monopolist faces the A monopolist faces the

entire market demand, he entire market demand, he can influence either thecan influence either the price price or theor the quantity quantity demandeddemanded but not both. If but not both. If he lowers the price, he will he lowers the price, he will sell more. If he raises the sell more. If he raises the prices, the quantity prices, the quantity demanded will demanded will ________________. Hence, ________________. Hence, he needs to search for or set he needs to search for or set a particular price that a particular price that maximizes maximizes _______________. Thus a _______________. Thus a monopolistmonopolist is ais a price price searchersearcher or aor a price setterprice setter..

drop

profits

13

advertising

Although monopolists do not face direct Although monopolists do not face direct competition, they still need to compete with sellers competition, they still need to compete with sellers selling close substitutesselling close substitutes. . Non-price competitionNon-price competition like _________________ and quality improvement like _________________ and quality improvement is usedis used..

14

15

No entry to the market & there is only ONE producer

No entry to the market & there is only ONE producer

Monopoly

16

 Group Discussion

Draw lines to match the examples of monopolies in Column A with the ways by which their monopolies are formed in Column B.

1.The Mass Transit Railway (MTR) a. By government franchise

2.The First Bus Co. Ltd. b. By government ownership

3.The China Light & Power Ltd. c. By patent, copyright

4.The Peak Tram d. Limited market demand

5.Hello Kitty e. Huge capital requirement and economies of scale

6.The Hong Kong International Airport f. Possession of superior raw materials

7.The Tate’s Cairn Tunnel Co. Ltd. g. By integration

8.The Water Supplies Department

9.The Organization of Petroleum

Exporting Countries (OPEC)

 10. Yun Nan Bai Yao(雲南白藥 )

17

franchise

Common franchises in Hong Kong

Ways Description Examples

•The Kowloon

•Motor Bus Co.

Ltd. http://www.

kmb.com.hk

1.

By government

franchise

•The government gives a

_____________ to a firm to

operate as the only producer

of a good.

Royalties are paid to the

government for having the

franchise.•The Hong Kong

PostOffice

2.

Government

Ownership

•The government owns the

industry and other sellers are

not allowed to enter the industry.18

market

one

satisfy

3.

By patent and

copyright

4.

Limited market

demand

5.

Huge capital

requirement

and Economies of

scale

•The producer has invented a new product and he

has the e__________ right to use new product for a

certain period.

•C_________ give writers, composers and artist

e_______ rights over their ideas for certain period.

•Plasma,

•Box Fan

?

Songs book

•The Hong Kong

Oxygen and

Acetylene

Co. Ltd.

•The Hong Kong

Electric Holdings

Ltd.

Limited _________ demand and only

_____ supplier in the local market can

fully _________ the market demand.

The industry requires heavy capital investment.

The firm needs to produce a huge output

to enjoy the benefits of e___________ of

S______. As a result,

1. its average cost of production is lower

than the potential competitors.

2. its output may be very high and so it can

satisfy the entire market demand.

xclusive

opyrights

xclusive

conomies

cale

19

superior

•De Beers (controls

the world’s finest

diamond mines)

6.

Possession of superior raw material

7.

By integration

•Firms in the same industry

may combine together until

finally only one firm

remains.

?

•The firm possesses

__________ raw materials.

The Organization

of Petroleum

Exporting

Countries (OPEC)

20

 exists when there are several dominant sellers in the market

OligopolyOligopoly OligopolyOligopoly

is with only a few sellersis with several dominant sellers which take up a relatively large market shares

?? ??

??RadioRadio

ShellShell

CaltexCaltex

MobilMobil

EssoEsso

Petroleum Petroleum tradetrade

e.g.e.g.Type of Type of businessbusiness

?? ??

??Travel agenciesTravel agencies

Cable & WirelessCable & Wireless

CTI NetsCTI Nets

New T&TNew T&T

New World Tel.New World Tel.

IDD servicesIDD services

HKSBHKSB

Bank of ChinaBank of China

Hang Seng BankHang Seng Bank

Banking industryBanking industry

e.g.e.g.Type of businessType of business

21

Features of An OligopolyFeatures of An OligopolyFeatures of An OligopolyFeatures of An Oligopoly

A few sellers supply a majority of the total A few sellers supply a majority of the total market supply.market supply.

22

Goods sold can be Goods sold can be h_____________h_____________ or or h______________h______________..

23

Oligopolistic sellers are Oligopolistic sellers are interdependentinterdependent. They . They will consider their competitors’ responses in will consider their competitors’ responses in deciding their business policies.deciding their business policies.

omogeneouseterogeneous

Entry into oligopolistic market is usually Entry into oligopolistic market is usually restricted restricted or or difficultdifficult..

24

ware ost rice ualityuantity

Information is Information is imperfectimperfect under under oligopoly. Neither sellers nor consumers oligopoly. Neither sellers nor consumers are fully a_____ of the c____, p____, are fully a_____ of the c____, p____, q______ and q_______ sold by different q______ and q_______ sold by different sellers.sellers.

Cost?

Price?

Quality?

Quantity?

Can “Mobile Phone Service” be classified as operating in an oligopoly?

25

Q.2

Sellers are interdependent in deciding their business policies?

Q.1

A few sellers supply a majority of the total market supply?

Q.3

Market information is imperfect?

Q.4

Goods sold are homogeneous or heterogeneous?

Q.5

Entry is restricted or difficult?

How about the petroleum trade?

Yes

Yes

Yes

Yes

Yes

26

Entry into oligopolistic market is usually Entry into oligopolistic market is usually restricted & difficultrestricted & difficult

Entry into oligopolistic market is usually Entry into oligopolistic market is usually restricted & difficultrestricted & difficult

Funeral ParlourFuneral Parlour

PetroleumPetroleum

Filling StationFilling Station

TV StationTV Station

Fixed Fixed

TelecommunicationTelecommunication

Services NetworkServices Network

NewspaperNewspaper

Travel AgencyTravel Agency Fast food shopFast food shop

SupermarketSupermarket

Which barrier(s) discourage(s) the new firms to enter the above markets?

27

28

BEHAVIOUR UNDER OLIGOPOLY

1.1. OligopolistsOligopolists can influence the market. They can influence the market. They are the price searchers.are the price searchers.

29

Pork $19Per Catty

10% discount for the elderly

2. Oligopolists are interdependent. If one seller lowers prices to attract more business, other sellers will follow. A price war will break out, and some sellers may go out of business.

30

$28 Trip to Shenzhen

31

3. Oligopolistic sellers often engage in non- price competition such as free gifts to promote their product.

32

Monopolistic CompetitionMonopolistic CompetitionMonopolistic CompetitionMonopolistic Competitionexists when features of both perfect competition and

monopoly are present.

Features similar to MONOPOLY

Features similar to PERFECT COMPETITION

1. There is a large number of sellers and buyers.

2. Entry into the market is relatively easy.

1. Monopolistic competitors sell heterogeneous product

2. Information is imperfect.

33

Can Taxi Service be classified as operating in a monopolistically competitive market?

34

1. Large number of sellers?

2. Easy to enter? (Relatively!)3. Sell heterogeneous product?4. Information is imperfect?

Yes

Yes

YesYes

How about restaurants?

35

Monopolistic CompetitionMonopolistic CompetitionMonopolistic CompetitionMonopolistic Competition

BEHAVIOURI. The monopolistically competitive firms are price searchers. As they sell ____________ products, they can set a slightly higher price without losing their customers. They need to find the particular ___________ that maximises ___________. 

differentiated

price profits

36

Monopolistically competitive firms can also charge different prices even for the same product. There are 2 reasons:

Boutiques Hair salon

Second, market information about the price is imperfect. It seems impossible for customers to search every shop for the best price.

First, services offered with the products may be different, e.g. high-quality service, professional advice.

37

38

II.II. It is common for monopolistic It is common for monopolistic competitors to engage in competitors to engage in non-p_____ c__________non-p_____ c__________, e.g. , e.g. advertising, offering gifts and advertising, offering gifts and organising lucky draws.organising lucky draws.

rice ompetition

III. Firms under monopolistic competition are usually located in the same area in a district. There are 2 reasons :

They can be easily known or

found out by customers.

It helps to reduce their

advertising costs.

The shops often try to

differentiate their products

or services, competition

may not be so keen.

Hong Kong Golden

39

The Major Monopolies in Hong KongName of Company

•The Kowloon Motor Bus Co., Ltd.•The Hong Kong Tramways Co., Ltd.•The New World First Bus Services Ltd.•The City Bus Co., Ltd.•The New World First Ferry Services Ltd.•Eastern Harbour Crossing•Western Harbour Crossing•Route 3 (Tai Lam Tunnel Section)•Tate’s Cairn Tunnel

Government franchise

•The Kowloon-Canton Railway Corporation•Hongkong Post•Airport Authority

Government ownership

•The Water Supplies DepartmentGovernment ownership, ownership of resources

Sources of Monopoly Power

•The China Light and Power Co., Ltd.•The Hong Kong Electric Holdings Ltd.•The Hong Kong and China Gas Co., Ltd.•Mass Transit Railway Corporation Ltd.

Huge capital requirement, economies of scale