MARKET
STRUCTURE
What is a market?
A market can be defined as a group of economic agents, usually firms and
individuals, who interact with each other in a buyer–seller relationship.
WHAT IS A MARKET STRUCTURE?
Market structure, in economics, refers to how different industries are
classified and differentiated based on their degree and nature of
competition for goods and services. It is based on the characteristics that
influence the behavior and outcomes of companies working in a specific
market.
Types of Market Structure
Perfect Competition
• Perfect competition occurs when there is a large number of small
companies competing against each other. They sell similar
products (homogeneous), lack price influence over the
commodities, and are free to enter or exit the market.
• Consumers in this type of market have full knowledge of the
goods being sold. They are aware of the prices charged on them
and the product branding. In the real world, the pure form of this
type of market structure rarely exists. However, it is useful when
comparing companies with similar features.
CONDITIONS IN PERFECT COMPETITION
1. Many buyers and sellers. Each of these must buy or sell such a small proportion of the
total market output that none is able to have any influence over the market price.
2. Homogeneous product. Each firm must be producing an identical product, for example
premium unleaded petrol or skimmed milk.
3. Free entry and exit from the market. This means that there are no barriers to entry or exit
that give incumbent firms an advantage over potential competitors who are considering
entering the industry. These barriers, which can represent either demand or cost advantages.
4. Perfect knowledge. Both firms and consumers must possess all relevant market
information regarding production and prices.
5. Zero transportation costs. This means that it does not cost anything for firms to bring
products to the market or for consumers to go to the market.
Monopolistic Competition
• Monopolistic competition refers to an imperfectly competitive market with
the traits of both the monopoly and competitive market. Sellers compete
among themselves and can differentiate their goods in terms of quality and
branding to look different. In this type of competition, sellers consider the
price charged by their competitors and ignore the impact of their own prices
on their competition.
• When comparing monopolistic competition in the short term and long term,
there are two distinct aspects that are observed. In the short term, the
monopolistic company maximizes its profits and enjoys all the benefits as a
monopoly.
• The company initially produces many products as the demand is high.
Therefore, its Marginal Revenue (MR) corresponds to its Marginal Cost (MC).
However, MR diminishes over time as new companies enter the market with
differentiated products affecting demand, leading to less profit.
CONDITIONS IN MONOPOLISTIC COMPETITION
1. There are many buyers and sellers in the industry.
2. Each firm produces a slightly differentiated product.
3. There are minimal barriers to entry or exit.
4. All firms have identical cost and demand functions.
5. Firms do not take into account competitors’ behaviour in
determining price and output.
Oligopoly
• An oligopoly market consists of a small number of large companies that sell
differentiated or identical products. Since there are few players in the market,
their competitive strategies are dependent on each other.
• For example, if one of the actors decides to reduce the price of its products,
the action will trigger other actors to lower their prices, too. On the other
hand, a price increase may influence others not to take any action in the
anticipation consumers will opt for their products. Therefore, strategic
planning by these types of players is a must.
• In a situation where companies mutually compete, they may create
agreements to share the market by restricting production, leading to
supernormal profits. This holds if either party honors the Nash equilibrium
state and neither is tempted to engage in the prisoner’s dilemma. In such an
agreement, they work like monopolies. The collusion is referred to as cartels.
CONDITIONS IN OLIGOPOLY
1 A relatively small number of firms account for the majority of
the market.
2 There are significant barriers to entry and exit.
3 There is an interdependence in decision-making.
Monopoly
• In a monopoly market, a single company represents the whole
industry. It has no competitor, and it is the sole seller of products
in the entire market. This type of market is characterized by
factors such as the sole claim to ownership of resources, patent
and copyright, licenses issued by the government, or high initial
setup costs.
• All the above characteristics associated with monopoly restrict
other companies from entering the market. The company,
therefore, remains a single seller because it has the power to
control the market and set prices for its goods.
CONDITIONS IN MONOPOLY
1. There must be a lack of substitutes for the product. This
means that any existing products are not very close in terms of
their perceived functions and characteristics. Electricity is a
good example.
2. There must be barriers to entry or exit. These are important in
the long run in order to prevent firms entering the industry and
competing away the supernormal profit. We now need to
examine them in detail.
Characteristics of different markets
Answer the following questions to be submitted in the google folder:
https://drive.google.com/drive/folders/1vF6XcFYe_ogWYN0OBSzjs426Y
ig66ay1?usp=sharing
1.) Why Perfect Competition Usually Does Not Happen?
2.) Why is perfect competition is desirable ?
THE END
