Market Structure

MARKET STRUCTUREMr. Rey Belen

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly

Click icon to add picture

Type of Market Structures

Perfectly Competitive Market• Less market

power• Price takers• Goods are

homogenous• Free entry

and exit• Perfect

Information

Monopolistic Competition• Many firms• Free entry

and exit• Differentiat

ed but highly substitutable product

Oligopoly• Small

number of firms

• Product differentiation may or may not exist

• Barriers to entry

Monopoly• There is

market power

• Single seller• One product

(limited or no good substitutes)




homogenous

• Free entry and exit

• Perfect Information




Oligopoly• Small

number of firms




market power




Price Taking1. The individual firms sells a very small

share of the total market output and, therefore, cannot influence market price.

2. The individual consumer buys too small a share of industry output to have any impact on market price.

Perfectly Competitive Markets

Product Homogeneity1. The products of all firms are perfect

substitutes2. Example

◦ Agricultural products


Perfect Information1. Buyers and sellers have all the pertinent

information necessary for them to make decisions on buying or selling goods and services.





and exit• Perfect

Information


and exit• Differentia

ted but highly substitutable product

Oligopoly• Small

number of firms




market power




The 1980s saw proliferation of gadgets and equipment to purify water.

The purification was done mostly at home.

Only simple process of passing tap water through a filter.

Water Refilling Station

The 1990s added the sophistication of water purification technology with the entrance of bottled water. Raw water passed through 6-8 processes of treatment.

The sophistication, along with packaging, branding, manufacturing costs, led to drinking water being expensive.


Water refilling stations provided a cheaper alternative. More than 3,000 stations are estimated to have been put up in the country presently.

Initially, customers came to stations with their own containers.


Eventually, services extended free delivery of 5-gallon containers with free use of a hot and cold dispenser provided a minimum weekly consumption is met.

Some stations also sold different types of dispensers and smaller sizes of bottled water.


There are no barriers to entry. In other words, there is free entry and exit.

There is product differentiation. The station claims to offer water treatment different from other stations through different technology. Thus, their treated water supposedly are slightly different from their competitors.

Products are substitutable with one another.

What Type of Market is Monopolistic Competition




and exit• Perfect

Information




Oligopoly• Small

number of firms




market power




The barriers to entry are:1. Natural

◦ Scale economies◦ Patents◦ Technology◦ Name Recognition

2. Strategic Action◦ Flooding the market◦ Controlling an essential input

Oligopoly

Prior to 1995, landline telephone dominated the telecommunication sector. PLDT was considered a monopoly back then.

In 1995, the Telecommunication Act of the Philippines (RA 7925) was enacted, setting the policy for competition and liberalization of

the telecommunication sector.

It opened up the paging and the mobile telephone business.


Mobile Cellular Phone Industry

The dismantling of the monopoly and opening of the country to other telecom companies has resulted in a drastic improvement in teledensity.

The cellular telephone system showed the greatest growth over the past eight years. This despite the fact that it initially was more expensive to own a cellular telephone and the rates are by the minute.

Cellular subscribers more than tripled from 500, 000 in 1995 to 1.8M by the end of 1999. Now, it is estimated to be more than 40M

Effects of the Deregulation: Teledensity

P9.50 per call

P1.00 per SMS

P9.50 per call

P1.00 per SMS

Comparison of Prices of the Major Firms Before the Entry of Sun Cellular.

*Both offering a discount if calling within their respective network

*Stayed the same until new market player entered the market.

Before SUNCELL entered the market, instead of price being lowered, strategic actions were being exhibited to gain bigger shares of the market

Strategic Actions

*But still both players offered the same services for the same price.

Facing several barriers upon entry i.e. market dominance of SMART and GLOBE, SUN CELLULAR entered the mobile telecommunications industry on 2003

Sun Cellular introduce a new pricing scheme which would give an alternative option to consumers.

Sun’s Rates as a New Player

P5.50 per minute to other networks

P1.00 per minute SUN to SUN

P1.00 per SMS to other networks

P0.50 per SMS within the network

P50 unlimited SMS for 7 days SUN to SUN

P100 UNLIMITED CALL AND SMS for 7 days

P150 UNLIMITED SMS for 30 days

P350 Unlimited SMS and CALLS for 30 days SUN to SUN

Sun Cellular’s Pricing Scheme

The 24/7 Call and Text Unlimited is a service that allow subscribers to enjoy unlimited local Sun-to-Sun voice calls and Short Messaging Service (SMS)

The complaint states that the pricing scheme offered by Sun will render other mobile phone firms to loose market share; this may lead to the survival of only one player, or may otherwise result in a monopoly

Legal Issues Against Sun Cellular

The two major players adjusted their prices to maintain their respective market shares and not lose to their competitor’s low rates

Major Players Followed Sun’s Prices

STRATEGIC ACTIONS OF ALL 3 NETWORKS TO GAIN A BIGGER SHARE OF THE MARKET

The Telecommunication industry (landline) started out as a monopoly.

As a whole, the mobile cellular phone market is a Oligopolistic market.◦ Three Major Players◦ Services are slightly differentiated◦ There are barriers to entry

What type of market is Oligopoly?




and exit• Perfect

Information




Oligopoly• Small

number of firms




market power




Barriers to entry1. Control of Inputs

◦ firm may own the total supply of a raw material that is essential in the production of some product.

◦ DE BEERS / MERALCO

2. Economies of scale◦ One supplier can produce at a lower per-unit

cost than several smaller firms.

Monopoly


Diamond

3. Patents◦ Exclusive rights given to inventors for a limited

period of time. ◦ AT&T / BELL COMPANY

4. Licenses/Franchises◦ Granted by the government as a condition for

operating in the market.

Monopoly


Receiving a U.S. patent for the invention of the telephone on March 7, 1876, Alexander Graham Bell formed the Bell Telephone Company in 1877, which in 1885 became AT&T. When Bell's original patent expired 15 years later in 1894, the telephone market opened to competition and 6,000 new telephone carriers started while the Bell Telephone company took a significant financial downturn


The monopolist is the supply-side of the market and has complete control over the amount offered for sale.

Limited by Demand

Monopoly

http://www.meralco.com.ph/meralco/Corporate/about/mh_100_years.htm#1


Philippine Electric Power Industry

http://www.meralco.com.ph/meralco/Corporate/about/mh_100_years.htm

Manila in 1903 was a city of about 220,000 inhabitants. Over a settlement of Tagalog clans at the mouth of the Pasig River, Spanish colonists had built Fort Santiago, and eventually a walled city, or Intramuros which became the administrative center.

But most of the inhabitants and their commerce were located outside the walls and north across the Pasig in an area about three to four times the size of Intramuros, in the suburban towns of Binondo, San Nicolas, Tondo, Sta. Cruz, Quiapo and San Miguel.

Colonial Outpost

Vehicular transportation in Manila then was provided by horse-drawn carriages - the quilez or calesa, the carromata, the caruaje - and the horse-drawn street railway of the Compania de los Tranvias de Filipinas.

Towards the end of the 1890s, however, the system had deteriorated badly due to uncertainty caused by the Philippine revolution and American conquest.

And by 1902, only about ten horsecars were in actual service each day.

Compania de los Tranvias de Filipinas

In 1903, about 3,000 electric light customers and the city government with its streetlights were served by an electric company called La Electricista organized in 1892.

La Electricista had built a central power plant on Calle San Sebastian (now R. Hidalgo). On January 17, 1895, its streetlights were turned on for the first time.

La Electricista

In 1901, the United States formally established civilian government in Manila, clothing the Second Philippine Commission with legislative powers to organize the new government.

Composed of five Americans and eventually three Filipinos, the Commission passed on October 20, 1902 Act No. 484 which formally called for franchise bids to operate an electric street railway and to furnish electric current for light, heat and power in the city and suburbs.

On March 5, 1903, the bids were opened and it turned out that the only bid submitted was that of Detroit entrepreneur Charles M. Swift.

On March 24, 1903, the Municipal Board passed Ordinance No. 44, granting to Swift what became the original basic franchise of Meralco.

On March 14, 1903, Swift incorporated in the State of New Jersey a company which was soon named Manila Electric Railroad and Light Company. "Meralco" was the acronym formed by the first letters of the corporate name.

Birth of Meralco in 1903

After winning the bid, Swift commissioned J.G. White for construction and engineering services. In September 1903, actual construction began on the track and overhead system in Manila.

Swift was also able to purchase both the Tranvia company and La Electricista sometime in 1904. Thus, Meralco started its electric service to Manila by taking over operation of La Electricista's system.

However, Meralco built its own steam generating plant on Isla Provisora near the Ayala Bridge which powered the streetcar system and eventually also the electric service.

Getting Started, 1903-1905

On April 10, 1905, Meralco's street railway system was formally inaugurated. By year-end, the completed system consisted of about 40 miles (63 km.) of track crossing the business section of Manila and beyond. It passed the busy streets of Binondo, Escolta, San Nicolas, Tondo, Caloocan, Malabon, Quiapo, Sampaloc, Santa Mesa, San Miguel, and other strategic parts of Manila.

Constituting for a long time the largest single investment of private capital of any nationality in the Philippines, it reflected a pioneering act of faith in the future of the country.

The tranvia system itself was described as state-of-the-art and second to none in East Asia.

The Streetcar System

Over the years, Meralco's transportation service grew and improved. Bigger and better streetcars with double wheel-trucks and closed sides were added. One of the early additions to the trackage was a major one from Sta. Ana to Pasig, adding 7.2 miles (11.6 km) to the total.

In 1920, Meralco embarked on a major five-year reconstruction program for its then 15-year old railway system. New streetcars were also designed and fabricated in the company shops. By 1924, the fleet consisted of about 170 cars.

The Company also experimented with trackless trolley buses that later replaced the streetcars on Calle Santa Mesa between the Rotonda and San Juan Bridge.

The Meralco Tranvia

Meralco management decided to expand its transportation service with its own autobuses after expanding the streetcar system no longer seemed economically viable. In 1927, 20 autobuses were first designed and fabricated in the company shops.

When war broke out in 1941, the bus fleet had expanded to more than 190 units, while the streetcars had fallen to 109. By that time, however, the transportation business was no longer Meralco's main source of income.

Within less than a decade from 1905, the annual earnings of Meralco's Electric Department began to surpass those of Transportation. When war broke out in 1941, Meralco's earnings were roughly 80% electric, 10% autobuses and 10% railway.

The Electric Service

The monopolist is the supply-side of the market and has complete control over the amount offered for sale.

Limited by Demand

Monopoly

Education

Market Structure