Chapter .

5: Market
/
Structure
Dr Chehat Ouahiba Dr. Fatiha Gueraria
 OBJECTIVES
By the end of this chapter, you will be able to:
➢ Understand the concept of a market in economics
as a place for the exchange of goods and services.
➢ Identify and differentiate between the major types
of market structures, including:
• Perfect or Pure Market.
• Imperfect Market, such as Monopoly, Oligopoly,
and Monopolistic Competition.
➢ Recognize the characteristics of each market
structure, such as the number of buyers and
sellers, the type of products, and market entry
barriers.
➢ Analyze the behavior of firms and industries
under different market conditions, including
pricing strategies and competition levels.
➢ Explore the implications of market structures on
economic outcomes like price determination,
2
efficiency, and consumer welfare
 I. Introduction

• Basically, when we hear the word

market, we think of a place where
goods are being bought and sold.
• In economics, market is a place where
buyers and sellers are exchanging
goods and services with the following
considerations such as:

• Types of goods and services being

traded

• The number and size of buyers and

sellers in the market

• The degree to which information can

flow freely

3
II. TYPES OF 1. Perfect or Pure Market
MARKET
STRUCTURE 2. Imperfect Market

4
 •Perfect Market is a market situation which consists
1. Perfec of a very large number of buyers and sellers

t or offering a homogeneous product. Under such

condition, no firm can affect the market price. Price

Pure is determined through the market demand and

supply of the particular product, since no single
Market buyer or seller has any control over the price.

Perfect Competition is built on two critical assumptions:

▪ The behavior of an individual firm 5

▪ The nature of the industry in which it operates

➢ The firm is assumed to be a price taker

➢ The industry is characterized by freedom of entry and exit
Perfect Competition cannot be found in the real world. For such to exist, the following
conditions must be observed and required:
❖ A large number of sellers
❖ Selling a homogenous product
❖ No artificial restrictions placed upon price or quantity
❖ Easy entry and exit
❖ All buyers and sellers have perfect knowledge of market conditions and of any changes
that occur in the market
❖ Firms are “price takers”

▪ Characteristics of Perfect Market

There are very many small firms
❖ All producers of a good sell the same product
❖ There are no barriers to enter the market
❖ All consumers and producers have ‘perfect information’
❖ Firms sell all they produce, but they cannot set a price.
6
 TARIFFS
2. IMPERFECT
MARKET
In economic theory, imperfect competition is a type of market
structure showing some but not all features of competitive markets.

Forms of imperfect competition include:

❖ Monopoly
7

❖ Oligopoly
❖ Monopolistic competition.
 • Monopoly
• Comes from a Greek word ‘monos’ which means ‘one’ and ‘polein’
means to ‘sell’

• There is only one seller of goods or services

• A monopoly should be distinguished from a cartel. Cartel refers to a

market situation in which firms agree to cooperate with one another to
behave as if they were a single firm and thus eliminate competitive
behavior among them.

• Sources of Monopoly
✓ There is only one producer or seller of goods and only one provider of services in the market.

✓ New firms find extreme difficulty in entering the market. The existing monopolist is considered

giant in its field or industry.

✓ There are no available substitute goods or services so that it is considered unique.

✓ It controls the total supply of raw materials in the industry and has no control over price.
✓ It owns a patent or copyright.
✓ Its operations are under economies of scale.
8
• Types of Monopoly
• Monopolies are classified according to circumstances they arise from, that is,
cost structure of the industry, possibly the result of law, or by other means

• a- Natural Monopoly: is a market situation where is a single firm can supply

the entire market due to the fundamental cost structure of the industry.
• b- Legal Monopoly: is sometimes called as de jure monopoly, a form of
monopoly which the government grants to a private individual or firm over the
product or services.
• c- Coercive Monopoly: is a form of monopoly whose existence as the sole
producer and distributor of goods and services is by means of coercion (legal
or illegal), so that most of the time it violates the principle of free market just
to avoid competition.

9
• OLIGOPOLY
➢ comes from the Greek word “oligo”
which means ‘few’ and “polein” means
‘to sell’.

➢ small number of sellers, each aware of

the action of others

➢ All decisions depend on how the firms

behave in relation to each other
❖ In oligopoly, conjectural
interdependence
is present, that is, the decision of one firm
influences and are influenced by the
decision of other firms in the market.

10
• Characteristics of Oligopoly
✓ There are a small number of firms in the market selling differentiated or
identical products.

✓ The firm has control over price because of the small number of firms providing the
entire supply of a certain product.

✓ There is an extreme difficulty for new competitors to enter the market.

• Types of Oligopoly

• a- Pure or Perfect Oligopoly: If the firms produce homogeneous products

• b- Imperfect or Differentiated Oligopoly: If the firms produce differentiated 11

products
• c- Collusive Oligopoly: If the firms cooperate with each other in determining
price or output or both.
• d- Non-collusive Oligopoly: If firms in an oligopoly market compete with each
other.
• Types of Organization of Oligopoly

✓ Cartel is a formal agreement among oligopolists

to set-up a monopoly price, allocate output, and
share profit among members.
✓ Collusion is a formal or an informal agreement
among oligopolists to adopt policies that will
restrict or reduce the level of competition in the 12

market.
 • Monopolistic competition
➢ Market situation in which there are many sellers producing highly differentiated products.

➢ Monopolistic competition is also perfect competition plus product

differentiation.

➢ Product differentiation gives each monopolistic competitor some market power,

since each competitor can raise price slightly without losing all its customers.

• Characteristics of Monopolistic competition

▪ A large number of buyers and sellers in a given market act independently.

▪ There is a limited control of price because of product differentiation.

▪ Sellers offer differentiated products or similar but not identical products.

▪ New firms can enter the market easily. However, there is a greater competition in the sense
that new firms have to offer better features of their products.

▪ Economic rivalry centers not only upon price but also upon product variation and
product promotion.
13
✓ Monopsony A market situation in which there is only one buyer
of goods and services in the market. It is sometimes considered
analogous to monopoly in which there is only one seller of goods
and services in the market.
✓ Monopsony power gives them the ability to control their unit
cost for an input which is similar to the way the monopoly
controls their price.
✓ Oligopsony A market situation where there are a small number
of buyers. This is usually with a small number of firms 14

competing to obtain the factors of production.

Under this market situation, firms are buyers and not sellers.
This is sometimes analogous to oligopoly, where there are few
sellers