A2 Micro: Market Structure, Conduct & Performance

This updated revision presentation is designed to help students preparing for markets-related topics on A2 economics specifications.

Market Structure Conduct & Performance - revision presentation

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Market structure is best defined as the organisational and other characteristics of a market. We focus on those characteristics which affect the nature of competition and pricing – but it is important not to place too much emphasis simply on the market share of the existing firms in an industry.

Traditionally, the most important features of market structure are:

*The number of firms (including the scale and extent of foreign competition)
*The market share of the largest firms (measured by the concentration ratio – see below)
*The nature of costs (including the potential for firms to exploit economies of scale and also the presence of sunk costs which affects market contestability in the long term)
*The degree to which the industry is vertically integrated - vertical integration explains the process by which different stages in production and distribution of a product are under the ownership and control of a single enterprise. A good example of vertical integration is the oil industry, where the major oil companies own the rights to extract from oilfields, they run a fleet of tankers, operate refineries and have control of sales at their own filling stations.
*The extent of product differentiation (which affects cross-price elasticity of demand)
*The structure of buyers in the industry (including the possibility of monopsony power)
*The turnover of customers (sometimes known as “market churn”) – i.e. how many customers are prepared to switch their supplier over a given time period when market conditions change. The rate of customer churn is affected by the degree of consumer or brand loyalty and the influence of persuasive advertising and marketing

Market structure and innovation

Which market conditions are optimal for effective and sustained innovation to occur? This is a question that has vexed economists and business academics for many years.

High levels of research and development spending are frequently observed in oligopolistic markets, although this does not always translate itself into a fast pace of innovation.

The work of William Baumol (2002) provides support for oligopoly as market structure best suited for innovative behaviour. Innovation is perceived as being “mandatory” for businesses that need to establish a cost-advantage or a significant lead in product quality over their rivals