Managerial #Economics ~ The Five #Market Structures

8 May

As always, this lesson is not intended to be professional advice. This is simply lesson material for ESL students in Business, Economics, and Finance classes. Posted here for their use or for helping other students.

DEFINITION

A market (市场) is a situation where two or more groups of people come together to trade resources (资源) as part of business. You can be trading money, goods, services – it doesn’t matter. Some examples would be:

The Mall (购物中心)
The Stock Exchange (股票交易)
Online Market (Taobao, JD.com)
Supermarket (Carrefour, Walmart) – 沃尔玛购物广场
Street Food Market (街头食品)

WHY DO WE HAVE MARKETS?

There are many reasons why we have markets!

First of all, think about the Buyer (买方). For them, maybe it is easier to buy all their things in one place. For example, isn’t it better to buy all your food, toilet paper, and cleaning supplies at the same store? It is faster, saves you bus money, and is less trouble.

Now think about the company. Why would an economist (经济学家) or finance officer or CEO think this is a really good idea? Remember, as a finance person, you should obey the wealth maximization rule (最大化利润) of business. This rule says you should do your very best to legally (法律上) and ethically (道德) make the most profit (收益) for the owners. So they join a market because it helps them make more MONEY!.

How? Just like the buyer, the seller wants to decrease costs (降低成本). Things like time, labor, work — they all cost the company a lot of money. If you can sell your product using less time or employees or effort, it saves you money! In a market, a lot more buyers come to shop than at other places. Maybe they want to find you, or maybe they wanted something else. For example, they came to the store to buy water but then saw you and also buy your pencils! Amazing! You did not have to pay for advertising, but you still got a surprise customer!

Some markets just save you time and money from advertising (like malls). You get a lot of customers without having to go find them. Others, like Taobao, create a place where it is easier to shop and pay and work together, so customers like it more and buy more products. There are a lot of good things about markets.

Industry Market

An industry (行业) is a special kind of market. This is not a building or place. It is used to name all the people buying and selling a specific product. For example, there is the Phone Market (all the people buying and selling phones). This market includes Huawei, Samsung, Apple, Oppo, Xiaomi, Meizu, and more. It also includes all the people who want to buy a phone (young people, older people, Chinese people, American people, etc).

There is also the Car Market 汽车行业 (all the people buying and selling phones). The Job Market 人才市场 (all the people looking for a job and offering a job). The Fashion 时尚 Industry (all the people buying and selling clothes and fashion).

These markets can be big or small, with lots of companies or just one company, with lots of buyers or just one buyer. They are international with buyers and sellers all over the world who meet each other and do business.

The Five Ways an Industry Market can be Structured (市场结构)

Market Structure (市场结构) is how an industry market is organized or arranged. There are actually FIVE different ways a market can be structured, so you must be careful about which one is for your product.

Why are they different? Maybe the number of companies is different. For example, there area lot of companies who sell pencils, but only a few companies who sell electricity (电力) for your house. Maybe there are many companies, but only ONE company is actually really big (Size). For example, for a long time only Microsoft Windows was available for computers. Some products are very special (独特) and there is no substitute (替代). (Kind of Product).

Here is the list of Market Structures:

1) Monopoly (垄断)

In a Monopoly, one company is the only real company and has lots of power. Usually, in this situation there is only ONE company in the whole market. Their product is VERY SPECIAL so there are no substitutes (替代) available. Maybe their product is really difficult to copy, or maybe the government made a law (法) that no one can sell a product like them. For some reason, there is no competition.

These companies are called PRICE-SETTING (价格制定者 | 决定价格) companies because it is easy for them to change their price and still keep their customers. If they want to raise the price $100, great! There is no competition, so the customers still have to buy the product from them. Even if the cost is very expensive!

One example in the US is Gilead, a medicine (医学) company. In 2016, the US government approved (合法) their new medicine for all people who have Hepatitis C (丙型肝炎) – a very dangerous disease. Gilead was the only company who had so much approval from the US government. It looked awesome! So many people with the disease want to use this cure. But Gilead was the only company. . . MONOPOLY! So the price was $74,760 (¥51,6083)! That’s a lot of money! (Source)

A monopoly does not always mean there is only one company. Sometimes there are a few other companies. But only one of them is big, famous, and sells the product. The rest cannot compete with that big company. So the big company has a lot of power no one else has.

2) Oligopoly (寡头垄断)

Image result for china eastern

In an Oligopoly, there are a small number of businesses. More than one, but still not a lot of companies. Usually their products are very similar, so they must compete a lot. If one company has a higher price, maybe the customer will just go to someone else. These companies are called PRICE-TAKERS 价格的接受者 (this means that if they change the price even a little from the average, maybe the customers will go to someone else. So it is very difficult to change the price.)

For example, airplane companies. In China, there is China Eastern, China Southern, Hainan Airlines, Air China, Shanghai Airlines, etc. Although there is more than one company, in the whole country there are actually not a lot of companies. And if you want to fly from Wuhan to Shanghai, maybe their services are very similar. So if you see that one company’s price is ¥1080 and another company is ¥1380 then you want to buy the ¥1080 ticket. They can change their prices a little if their service is more special (for example, their time is faster). But usually their prices are very similar.

3) Monopsony (买方垄断)

The Monopsony market is not very common.

In this market, there are a many sellers, but only a few people who want to buy. Today, we see this in the job market. Think about it. Right now, there are a lot of people who want to sell their labor — they want to work for a company and make a good salary. But there are only a few company’s who want to buy your work. So there are a lot of “work sellers” (employees), but only a few buyers (companies).

Another example is people selling Old Televisions or Computers. In this situation, maybe a lot of people want to sell, but only a few people want to buy. So the buyer has the power and can decide what the price should be.

In this situation, the companies have a lot of power and are PRICE-SETTING. It is difficult for most employees to decide their salary, the company will choose your salary (the price for work).

4) Monopolistic Competition (垄断性竞争)

There are many companies in this market, and their products are similar, but different. Think about Movie or Music companies. For example, the two TV shows “Three Lives Three Worlds, Ten Miles of Peach Blossoms” (三生三世十里桃花) and “The Journey of Flower” (花千骨). These shows were a little similar. They are fantasy (幻想) shows with magic, romantic stories about cold men who fall in love with brave women, etc. The shows are similar, but they are also different. So maybe you like one show, but you did not want to see the other show.

For Western readers, compare Vampire Diaries and True Blood. Both TV Shows were directed towards young viewers and focused on Vampires. They had very similar audiences and competed for the viewers attention. But at the same time, they were very different so some people who liked True Blood maybe didn’t like Vampire Diaries and vice versa. Or maybe one was at a better time or something.

In this situation, the companies are competitors, but not always substitutes. So they are both PRICE-SETTING and PRICE-TAKING companies. They are Price-Taking, because if they are too expensive compared to the rest, people who go to a different company even if the product is not as good. But they are also Price-Setting because they can raise their price a little high without being too expensive. For example, maybe a popular singer like Jay Chou or Taylor Swift can make their CDs more expensive than singers who are not popular.

Let’s say most CDs are selling for $15. Then you probably cannot sell your CD for $40. People will be unhappy with your company and choose to leave. But you might be able to sell it for $22 if your music is better than normal.

5) Perfect Competition (完全竞争)

The biggest markets are the Perfect Competition Markets. These are markets where:

There are MANY sellers.
The products are pretty similar or “non-differentiated.”
Companies are Price-Takers

Image result for bottled water

Think about the water (水) market. Here in China, there are many, many, many different companies selling bottled water. For example, Nongfu (农夫山泉) and Evian (依云). Although the companies are different, the water is pretty much the same. You don’t care if you drink water from one company or water from another company – they are all the same. So why do so many students at my university drink Nongfu instead of Evian? Because Nongfu water is only 2¥, but Evian is often 10¥ or more. What if Nonfu changed their price to 4¥? Would you still buy their water? Maybe no! Because there are other companies (竞争者) who sell the same water for less money! So maybe it is very difficult for Nongfu to change their prices. They do not have a lot of “price power,” so we call them a ‘Price-Taking’ company. This kind of situation is called a competitive market.

Image result for nongfu