Exercises: Market structures

Explain which four conditions define perfect competition (number of firms, type of product, barriers to entry and price-setting power) and why firms in it are said to be "price takers." Illustrate this with the example of a fruit stall at a farmers market.

Define these four market structures and give a real-life example of each, different from those covered in class: perfect competition, monopolistic competition, oligopoly and monopoly.

The figure orders the market structures according to the price-setting power of each firm, but one of the four boxes is empty.

1. a) Which market structure occupies the empty box? Explain your answer based on the features indicated below it.
2. b) Explain what the bottom arrow means and why the four structures are ordered in this way.

Explain what barriers to entry in a market are and describe three examples: an administrative license, enormous start-up costs and a patent. State, in each case, which market structure they favor.

Explain the difference between a homogeneous product and a differentiated product and give two examples of each. Explain in which market structures each type of product is found.

In one country, only four cell phone companies share practically the whole market.

1. a) Identify the structure of that market.
2. b) Point out two features that led you to that conclusion.

A city's drinking water supply is provided by a single utility company.

1. a) What market structure is this? Justify your answer.
2. b) Explain why the firm in this structure is said to have power over the price, unlike a farmer in perfect competition.

A country's food delivery market is dominated by three large platforms.

1. a) Classify the structure of the market.
2. b) Explain what barriers to entry make it hard for a small new platform to challenge them (already registered users, the network of drivers, agreements with restaurants).

The coffee shop market in a city has hundreds of venues, each with its own atmosphere, menu, and more or less loyal clientele.

1. a) Classify the structure of this market and justify it using at least two criteria.
2. b) If a coffee shop raises the price of coffee by $10\ \%$, will it lose all its customers? Relate your answer to product differentiation.

On a highway, there are only three gas stations in $200$ kilometers. When one of them changes its price, the other two copy it within hours.

1. a) Identify the structure of this market and explain what interdependence between firms is.
2. b) Reason why these firms might be tempted to agree on prices (collusion) and what consequences this would have for drivers.

Classify each of these markets into its market structure and justify each decision using the criteria studied: wheat (thousands of farmers with a virtually identical product), hair salons in a city, supermarket chains (four chains account for almost all sales), and a country's natural gas pipeline network (a single pipe reaches each house).

In a city, new boutique gyms open every year (spinning, CrossFit, yoga), each with its own style and schedule, and they coexist with the big chains.

1. a) Classify the structure of this market and justify it with two criteria.
2. b) Explain what role product differentiation and advertising play in this structure.
3. c) Reason what will happen to the extraordinary profits of a very successful gym in the long run if entry into the market is free.

The air route between two capital cities is operated by only two airlines. When one launches a special offer, the other responds within a few days with a similar one; when one improves its schedules, the other imitates it.

1. a) Identify the market structure and explain it.

1. b) Explain what interdependence is and how it shows up in this case.

1. c) Explain why both airlines may want to avoid a price war.

A pharmaceutical lab is the only seller of a drug thanks to the patent. When it expires, several generic manufacturers enter the market and the price falls by $60\ \%$.

1. a) What market structure existed while the patent lasted and what type of barrier to entry is it?
2. b) How does the market structure change when the patent expires?
3. c) Explain why the government grants patents (and therefore temporary monopolies) even though monopolies make products more expensive.

Compare the power over the price of a vegetable farmer (thousands of producers with an almost identical product) and that of one of a country's four cell phone carriers.

1. a) Who is a price taker and why?
2. b) Explain what would happen if the farmer raised his price by $20\ \%$.
3. c) Explain what the carrier would have to weigh before raising its rates by $20\ \%$.

The world music streaming market is dominated by a few platforms that offer similar catalogs but compete with exclusive podcasts, personalized playlists and sound quality.

1. a) Classify the structure of this market.
2. b) Identify two barriers to entry that protect the current platforms.
3. c) Explain why, despite being an oligopoly, they compete more through differentiation than through price.

In a state, four supermarket chains account for $85\,\%$ of the market share. Following a $10\,\%$ increase in energy and transport costs, the prices of the basic basket in all four chains have risen identically ($+18\,\%$) within two weeks.

1. a) The consumer association denounces that there is an illegal price-fixing agreement (cartel), while the business association argues that it is the logical and independent response of efficient firms facing identical costs. Interpret the data and analyze which signs would support the thesis of tacit or explicit collusion versus the business association's stance.
2. b) Use game theory (the prisoner's dilemma) to predict what incentives one of the four chains has to covertly break this price level through personalized discounts on its cell phone app, and what strategic response it would trigger in its rivals.
3. c) Design a public intervention proposal for this market that does not consist of setting price ceilings by law (justifying why the latter measure would cause shortages) and predict its impact on effective competition in the sector.

The state public rail infrastructure manager retains exclusive ownership of the tracks and stations, but has liberalized passenger transport by allowing the entry of new private operators that pay a toll to run on them.

1. a) Economically justify, based on the behavior of fixed costs, average costs, and economies of scale, why it makes sense to maintain a natural monopoly in the physical infrastructure (tracks), but it is viable and efficient to introduce competition in the provision of the transport service (trains).
2. b) Following the entry of competitors, tickets on the busiest high-speed line have fallen by $35\,\%$, but medium-distance and rural lines still fail to attract private operators and accumulate losses. Explain this phenomenon using the concept of "cross-subsidization" and predict what territorial consequences applying solely free-market logic across the entire network would have.
3. c) Design an economic regulation mechanism that makes it possible to finance the maintenance of unprofitable but socially necessary lines without resorting to raising general taxes or driving new high-speed competitors out.

An analyst states in a debate: "To maximize consumer welfare, the government should intervene and force all economic sectors (from the automotive industry and telecommunications to pharmaceuticals) to be broken up into thousands of identical small firms that compete under perfect competition."

1. a) Economically refute this statement by demonstrating why pure perfect competition is unfeasible and inefficient in capital-intensive sectors with high fixed R&D costs and strong economies of scale.
2. b) Compare the surplus that consumers obtain under monopolistic competition (such as fashion or dining, where they pay a markup over marginal cost due to differentiation and branding) with a hypothetical scenario of perfect competition with a homogeneous product and no variety. Justify whether this markup necessarily constitutes waste or a deadweight loss.
3. c) Determine what trade-off economic policy faces between static efficiency (prices tightly aligned in the short run through price competition) and dynamic efficiency (innovation, quality improvements, and long-term technological development).

Consider two markets in an economy:

• Market A (wholesale wheat): hundreds of farmers offer identical grain; the price is set on the international commodity exchange and equals the minimum long-run average cost ($0.22\ \text{\$/kg}$).

• Market B (piped natural gas distribution): a single company manages the city's underground pipelines; its marginal cost of distribution is $0.05\ \text{\$/kWh}$, but it sets the rate at $0.14\ \text{\$/kWh}$ taking advantage of the inelasticity of domestic demand.

1. a) Analyze and compare the equilibrium in both markets and explain why Market B generates a "deadweight loss" for society, detailing how consumer surplus is redistributed.
2. b) Suppose that the federal government forces the monopoly in Market B to set a rate equal to its marginal cost ($0.05\ \text{\$/kWh}$). Predict what financial problem the gas company will face if its fixed installation costs are very high and why this conventional measure would lead to its shutdown.
3. c) Design an alternative tariff regulation (such as a two-part tariff: fixed access fee plus a variable fee per consumption) that allows the gas company to cover all of its costs without distorting efficient consumption by users.

Topic challenge. Become an economic consultant by analyzing the coffee shop market or the streaming platforms market in your local area. Prepare a short executive report following these steps:

1. Data collection: Design a micro-survey for $6$ people asking how many monthly units they would demand at three hypothetical prices ($1.00$ dollars, $1.50$ dollars, and $2.50$ dollars). Also note down which real firms compete in that market.

2. Demand and elasticity: Build a table showing aggregate demand, draw the corresponding curve by hand, and calculate the price elasticity of demand between two prices: $E_p = \left| \frac{\% \Delta Q}{\% \Delta P} \right|$. Classify the result as elastic, inelastic, or unit-elastic, explaining the reasons for this sensitivity.

3. Structure and equilibrium: Identify the structure of this market (monopolistic competition, oligopoly...) by analyzing its barriers to entry and product differentiation. Explain how the interaction between supply and demand determines the real equilibrium price by observing your surroundings.

4. Reasoned proposal: Recommend to a business in the sector whether it should raise or lower prices to maximize revenue, relying on the value of elasticity and competitive pressure.

Assessment criteria:

• Accuracy in data tabulation, elasticity calculation, and graphical representation of the curve.

• Coherent justification of the market structure and the forces that determine equilibrium.

• Quality of the report and relevance of the strategic recommendation based on the data obtained.