Market Structure

Ravi Yasas Jayasundara ICT / 10 / 11 / 013

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What is the market structure?

Market structure is the collection of factors that ascertain how buyers and

sellers interact in a market, how prices change and how different levels of

the production and selling processes interact each other. Market structure

identifies how a market is made up in terms of,

Number of firms in the industry

Firm’s behaviors

Nature of the product

The extend of barriers to entry’

The degree of monopoly power

Price levels of the products

Types of market structure

1. Oligopoly

2. Monopoly

3. Perfect competition

4. Monopolistic competition

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Oligopolies

A market structure can be characterized by competition among a small

number of large firms that have market power. This characterization is

called oligopolies.

Think about real life example.

A situation where there are only a few sellers in a particular economy

who control a particular commodity. They can, therefore, influence

prices and affect the competition. In Sri Lanka, think about mobile

network operators. There are only a few operators such as Dialog,

Mobitel, Hutch, Airtel and Etisalat.

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Features of oligopolistic market structure

Potential for collusion

Non price competition may be prevalent

High barriers to entry

Price may be relatively stable through the industry.

Goods could be homogenous.

Advantages of oligopolistic market structure

The businesses have a lot of control Prices can become competitive Allows for greater efficiency through standardization

Disadvantages of oligopolistic structure

Consumer may suffer from high prices Less creative products Barriers to new entries

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Monopoly

A monopoly is exclusive control of the market by one business because

there is no other group selling the product or offering the service. A true

monopoly rarely exists because if there is no competition, business will

increase the price while reducing output to increase profits.

A pure monopoly is defined as a single supplier.

What is the monopoly power?

Monopoly power is the degree of power held by the seller to set the price

for a good.

Characteristics of firms exercising monopoly power

Price

Efficiency

Innovations

Collusion

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Advantages of monopoly

Exploit economics of scale

Revenue

Dynamic efficiency

Avoidance of duplication of infrastructure.

Disadvantages of monopoly

Causes reduction of the quality of the product

Increased prices

Causes reduction satisfaction of the customer.

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Perfect competition

Perfect Competition is a market structure where there is a perfect degree

of competition and single price prevails.

Think about real life situation. A fish market might be an example of

something close to this (though real "perfect competition" doesn't

really exist) At the fish market, lots of sellers gather together to try

to sell the same wares, and lots of customers try to buy them with a

good knowledge of what they are buying. There is little to prevent

someone from joining in on the selling or quitting the market

altogether.

Other one is Foreign Exchange Market. Here currency is all

homogenous. Also traders will have access to many different buyers

and sellers. There will be good information about relative prices.

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Characteristics of perfect competition

Large number of firms

Products are homogenous

Free to enter and exit

Consumers and products have perfect knowledge about market

Advertisement cost is zero

No government intervention

Advantages of perfect competition

Optimal allocation of resources

Competition encourages efficiency

Responsive to consumer wishes

Consumers changed a lower price

Disadvantages of perfect competition

Insufficient profits for investment

Lack of product variety

Lack of competition over product design and specification

Unequal distribution of goods and income

externalities

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Monopolistic competition

Monopolistic Competition a market structure in which many firms sell

products that are similar but not identical.

Many small businesses operate under conditions of monopolistic

competition, including independently owned and operated high-street

stores and restaurants. In the case of restaurants, each one offers

something different and possesses an element of uniqueness, but all are

essentially competing for the same customers.

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Characteristics of Monopolistic competition

Large number of firms in the industry

Consumer and product knowledge imperfect

Entry and exit from the industry is easy

Firms are price makers and are faced with a downward

sloping demand curve

Examples for Monopolistic competition

Hotels, Inns, Restaurant business

Private schools

Insurance brokers

Funeral directors

Advantages on monopolistic competition

Lack of barriers to entry

Differentiation brings greater consumer choice and variety

Product and service quality

Consumers become more knowledgeable of products

Disadvantages of monopolistic competition

Higher prices

Allocative inefficient

Advertising

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There you can see all in one structure. It will be help you to

understand real life situation of Market Structure.

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References

http://en.wikipedia.org/wiki/Main_Page http://www.tutor2u.net/blog/index.php/economics/ http://economicsonline.co.uk/Business_economics/Competition_and_m

arket_structures.html http://wiki.answers.com/Q/What_is_an_oligopoly#slide1 http://www.ask.com/question/oligopoly-structure