Market Failure

Market Structure

A market structure is a term for the conditions which exist in a market. There are several categories of a market structure, from very competitive to monopolies that do not face any competition.

Scale of Production

The size of production units and the methods of production used

Sunken Costs

These are costs that cannot be recovered from the firm if they leave the country. These could be things like money spent on advertisement or them buying very industry specific machinery that cannot be sold anywhere else

Supernormal Profit

The profit above the needed to keep a firm in the market in the long run. They are usually much higher than the normal profits that you could be getting, and they do not lost for much long because these kinds of profits could be removed as they attract more competitors into the market

Barriers to Exit and Entry

This is anything that makes it difficult for a firm to start producing the market or to enter or grow and leave the market. These could come in may ways where one of them could be extremely high startup costs and high sunken costs.

Competitive Market

In competitive markets, there is usually relatively free entry into and exit from the market. This means that there must not be anything that makes it difficult for the firms to enter or leave the industry, which is to start or stop producing the product.

In a competitive market, there is pressure for firms to keep prices low. If an individual firm charges a higher price, it runs the risk of losing all of it’s sales to its rivals as the products are likely to be close substitutes. Firms may seek to gain a competitive advantage by improving their products. They are likely to respond quickly and fully, to any changes in demand. Easy entry and exit will mean that in the long term firms will probably earn relatively low profits

A high level of competition is usually expected to promote efficiency. It provides firms with both an incentive and a threat to produce according to consumers’ wants at the lowest possible cost. Any firm that can respond more quickly to consumers’ demands, or can cut its costs should gain a competitive advantage and earn higher profits.

Monopolistic Markets

A monopoly is a sole supplier of the product having 100% of the market share. This is often referred to as a perfect monopoly, while in reality when a company accumulates over 25% of the market’s shares, they are a monopoly. Monopolies arise when one firm has become so successful that they manage to drive other firms out of the market, or they could have been the first in a market and then setup barriers to entry. It may be setup if it is better to have no competition for example water and electricity.

The characteristics of a monopoly are as follows–

There are high barriers to entry and exit, making it difficult for other firms to enter the market
A monopoly is the price maker, its output is the industry’s output and so changes in its supply affect the market price
A firm might have been successful in cutting its cost and responding to changes in the consumer tastes in the market, causing it to drive out other firms and capture the entirety of the market.
Mergers and Acquisitions may have resulted in a decrease in the number of firms present in an industry
A monopoly could have existed from the start, due to the misuse of the monopolistic powers, issued by the government.

The existence of barriers to entry means that monopolies can earn supernormal profits in the long run. Firms may not be aware of these high profits earned and even if they would want to enter the market, they are restricted from doing so due to the high barriers of entry

A monopoly has control over the supply of the product but although it can seek to influence the overall level of demand, it has no control over it. A monopoly has to make a choice. It can set the price but then it has to accept the level of sales that consumers are prepared to buy at that price. On the other hand, it chooses to sell a given quantity, the price will be determined by what consumers are prepared to pay for this quantity