Hi.
Melvin here from ThatEconsTutor.
Okay, today, I will be going through with
you an approach to covering this topic on
market structure.
We all know how big this topic is.
And a lot of students, first of all, they
have problems trying to understand the exact
scope of this topic, and the second thing
is, of course, how to apply the concepts.
So let me share with you a methodology that
I have, and I hope after going through this,
you can try to develop some of your notes
along those lines that I've covered.
So that's really going to help you understand
this topic and then be prepared to apply the
concepts a lot better.
Okay, so, in market structure, when I talk
to my students, and say if I ask them, "The
moment you think of this topic, what concepts
will come to your mind?"
And students will normally tell me, "Okay,
when I think of market structure, I'll think
of a PC firm.
I think of how to decide on the profit outcome."
Some students may say, "Well, I think of this
concept of price rigidity, or I think of efficiency
concepts.
Or I think of economies of scale."
The concept of barriers to entry, price, business
non-price, competition, et cetera.
And the list just goes on and on.
So, what you can see is that a lot of students,
when they come across market structure, they
tend to link it back to the content, which
is what they cover in their notes.
And the content is definitely important, because
in most of the schools, what you do is you
cover each market structure in terms of the
features and what kind of profits are made,
including a determination of the efficiency
outcome.
You do it market structure.
Why market structure?
So, the order is usually TC, MC, oligopoly,
and then a monopoly.
So the way to understand market structure
is to try, or rather I would like you to try
to rearrange or repackage some of these concepts.
And if you repackage them, I'll say try to
think of them along these three lines.
The first one pertains to features.
For features we will use the features of this
firm to understand behavior.
So behavior of a firm, we can break this down
into pricing and competitive.
So, within this topic, these are basically
the two ways in which firms can behave, and
after you've studied how they behave, we will
assess their performance.
So, FBP.
And this is what I call the application approach.
So, rearrange or sort out your understanding,
which is based on your school notes, along
the following three broad categories: visions,
behavior, and performance.
And what can help is, of course, if we know
that questions normally revolve around this
tree.
Let's come up with methodologies to answer
these questions.
I think that will really help students, especially
when you are doing your essay, you know that
there's a certain market or there's a certain
essay structure that you can use that's going
to save you a lot of time.
So, to understand features, I will recommend
a BICEPS acronym.
So BICEPS refers to barriers to entry, nature
of info, how they compete, economies of skill,
product nature, share of market.
And once you understand the features, you
will use it for two types of questions.
The first one is to identify market structure.
So, usually a case study, you'll see a four-mark
or a two-mark question where you're asked
to identify the type of market structure.
So you can take your pick from the features
here.
Usually, the focus is based on barriers to
entry or the share of the market.
So, other than identifying the type of firm,
you could be asked to differentiate between
different types of market structures.
So differentiation, we also use BICEPS, but
in addition, you can look at the profit outcome.
For example, MC firms and PC firms can only
make normal profits in the long run, while
monopolies and your oligopolies can go on
to make supernormal profits.
So this is what I would call a BICEPS plus
P framework.
Moving on to behavior.
now, I try to think of these parachute concepts
like a giant magnet.
So it's like a horseshoe magnet, which attracts
different parts of your content and groups
them together under this application methodology.
So when I think of pricing behavior, there
are four things that I consider.
The first one is the profit-maximizing pricing
decision.
So firms normally set price and output based
on the point where MC cuts MR, so this is
the first thing that determines a firm's pricing
behavior.
Next, I also understand that PC firms exhibit
a different kind of pricing behavior.
They are price takers, and you are required
to understand and be able to explain why,
as well.
The third type pertains more to oligopolies.
Because they are mutually interdependent,
they tend to experience price rigidity, also
known as price stickiness.
Finally, if a firm has a lot of market power,
say in the case of a monopoly, they are likely
to engage in price discrimination.
So if you have an essay question where they
ask you how, for example, barriers to entry
affects a firm's pricing behavior, you can
consider how barriers to entry effect MC,
MR, how they result in TC firms hardly experience
any or hardly have any barriers to entry,
how it results in them being price takers.
And if barriers to entry are very high, but
not high enough to create a monopoly, you
end up with oligopolies, which are mutually
interdependent, and finally, price discrimination
if barriers to entry are very high until a
firm possesses almost monopoly power, then
they have the ability to also engage in PD.
So that's for pricing behavior.
If I look at competitive behavior, it is also
possible to do a split, or rather to do a
full chart.
So if I look at how firms compete, they can
either compete based on price or nonprice.
Based on price competition, if you have two
firms which are quite similar in terms of
market share and maybe in terms of the reserve
that they have, they may engage in price wars.
Price wars are generally not desirable because
they result in losses on both sides, but if
you have a bigger firm which is trying to
deter the entry of new firms or to force out
an existing firm which is fairly smaller in
size, you could engage in predatory pricing.
So unlike price wars, predatory pricing is
not determinative, so it's not a case of firm
A cuts its price, firm B cuts its price, and
then firm A retaliates.
So it doesn't work that way.
It's more of a one-sided battle.
So predatory pricing could be used to chase
out existing rivals which are weaker and in
the process, or rather overall, increase the
market power of the existing firm.
Now, we could also have non-price competition
in terms of real competition.
So product quality or the service delivery
improves.
On the other hand, you have imaginary competition,
which is more of advertising, product packaging,
and the like.
So this is how firms can compete.
But let's not forget firms may choose not
to compete, as well, so if they do not compete,
they can either merge or acquire another firm,
or in some cases they could collude.
But students should avoid suggesting collusion
as a strategy because collusion is technically
not legal unless you get tacit collusion,
which is more of price leadership, so that's
still okay.
And overall, other than competition based
on price or nonprice aspects or MNAs or collusions,
firms can also try to lower their cost or
build upon barriers to entry.
So again you see the recurrence of certain
concepts that we learned earlier on in the
chapter, but you can still bring them in to
suggest how a firm can become more competitive.
So let me just briefly show you what I cover
in my book, as well.
So under market structure, I split this into
features, behavior, and performance.
So under features, I have identification and
differentiation of firms.
So BICEPS, the acronym is here, and I do a
comparison across the four market structures,
and I'll show you how you can use this to
identify or differentiate firms.
So this is the BICEPS plus P framework, which
I mentioned.
And some examples here, from behavior, these
are the four things I mentioned under pricing
behavior.
So elaboration on each type of them and of
course an example on how barriers to entry
affect pricing behavior.
So, basically, I'll go through the four types
of pricing behavior in my essay.
That pretty much forms the whole content.
So competitive behavior, this flowchart is
also what I have explained.
Now, the last one.
Now that you have understood the features
of a firm and how they behave, you can also
understand how to evaluate their performance.
The first thing you should understand is that
competitive, or rather performance of the
firm, usually depends on the extent of competition.
And depending on whose perspective you take
-- producers, consumers, or society -- you
could be looking at different outcomes.
So what I'll do in my notes is also consider
the impact of higher market power on producers
in terms of profits, consumers, in terms of
surplus, variety, and quality, which are things
that consumers value, or society, under efficiency
and equity.
So this will give you a very good idea of
how to assess a firm's performance based on
the three different stakeholders.
So, I hope you found this useful because I
do agree, students, this topic on market structure
is very big, so you need to have some framework
to understand this topic a lot better so that
you know more or less what kind of questions
can come up, and when they do appear, what's
the methodology that can be used.
Okay?
So, I hope you've enjoyed this video and most
importantly found it useful.
You can contact me, again, the pen is not
writing.
You can contact me at -- it's just not working.
Okay, anyway, I'm reachable at my website
at thateconstutor.com.
So it' T-H-A-T-E-C-O-N-S-T-U-T-O-R.
thateconstutor.com.
Or you can e-mail me at thateconstutor@gmail.com.
Okay?
That's all.
Thank you.
