2023 Curriculum CFA Program Level I Economics Show
IntroductionThe purpose of this reading is to build an understanding of the importance of market structure. As different market structures result in different sets of choices facing a firm’s decision makers, an understanding of market structure is a powerful tool in analyzing issues such as a firm’s pricing of its products and, more broadly, its potential to increase profitability. In the long run, a firm’s profitability will be determined by the forces associated with the market structure within which it operates. In a highly competitive market, long-run profits will be driven down by the forces of competition. In less competitive markets, large profits are possible even in the long run; in the short run, any outcome is possible. Therefore, understanding the forces behind the market structure will aid the financial analyst in determining firms’ short- and long-term prospects. Section 2 introduces the analysis of market structures. The section addresses questions such as: What determines the degree of competition associated with each market structure? Given the degree of competition associated with each market structure, what decisions are left to the management team developing corporate strategy? How does a chosen pricing and output strategy evolve into specific decisions that affect the profitability of the firm? The answers to these questions are related to the forces of the market structure within which the firm operates. Sections 3, 4, 5, and 6 analyze demand, supply, optimal price and output, and factors affecting long-run equilibrium for perfect competition, monopolistic competition, oligopoly, and pure monopoly, respectively. Section 7 reviews techniques for identifying the various forms of market structure. For example, there are accepted measures of market concentration that are used by regulators of financial institutions to judge whether or not a planned merger or acquisition will harm the competitive nature of regional banking markets. Financial analysts should be able to identify the type of market structure a firm is operating within. Each different structure implies a different long-run sustainability of profits. A summary and practice problems conclude the reading. Learning OutcomesThe member should be able to:
SummaryIn this reading, we have surveyed how economists classify market structures. We have analyzed the distinctions between the different structures that are important for understanding demand and supply relations, optimal price and output, and the factors affecting long-run profitability. We also provided guidelines for identifying market structure in practice. Among our conclusions are the following:
Which of the following is a characteristic that differentiates oligopoly from the other market structures?Option c) is correct: Strategic Interdependence.
In an oligopolistic market, the goods are closely related, but few firms are there, so each firm is interdependent to maximize profit. They decide price and output together to capture the market.
What is one characteristic of an oligopoly market structure quizlet?One characteristic of an oligopoly market structure is: firms in the industry have some degree of market power. many firms, differentiated products, and free entry.
What are some differences between an oligopoly market and a competitive market?Both types of markets sell related products. Further, oligopolies sell at a higher price than the marginal cost, and competitive markets sell at a price equal to marginal cost. Finally, oligopolistic firms are price makers and competitive firms are price takers.
What distinguishes oligopoly from monopolistic competition?Under monopolistic competition, many sellers offer differentiated products—products that differ slightly but serve similar purposes. By making consumers aware of product differences, sellers exert some control over price. In an oligopoly, a few sellers supply a sizable portion of products in the market.
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