THE BUSINESS ORGANIZATION

Business organizations are a major component in the economy. Their main goal is to
attract customers, and to consequently earn profit. Businesses provide for the needs,
wants and demands of the economy.

Businesses have an important partnership with the government. For the economy,
businesses serve as provider goods and services to the consumers, on one hand, and
provide investments, employment and social responsibility to the economy provides the
necessary factors of production to businesses.

Business and government work together for progress and development. Businesses pay
the necessary taxes to the government, and in return, the government provides the
proper infrastructures, such as electricity, water, roads and highways, communication,
railways, etc. these factors are essential in improving the efficiency of operations of the
business sector.

FORMS OF BUSINESS ENTERPRISES

Single or Sole Proprietorship

Single or sole proprietorship is a form of business owned by a single person, known as

the proprietor. Because one person can organize it, it is the easiest enterprise to set up.
Most of the country’s businesses (including those which are not registered) belong to
single proprietorship. The bulk of self-employed people are single proprietors, and these
include the informal or unorganized sector.

Organizing a Sole Proprietorship (Mejorada 1999)

 Register the business name (Department of Trade & Industry).

 Pay the municipal licenses to the local government.
 Apply for VAT or non-VAT number
 Register with the BIR the books of accounts (simplified bookkeeping records or
journals and ledger) and the business forms to be used (sales invoices, cash
sales invoices, official receipts, etc.)

Advantages of sole proprietorship

The following are the advantages of sole proprietorship:

1. It is easy to organize
2. Its organization and operation only involves few business requirements.
3. The single proprietor is the boss. The proprietor has all the freedom in terms of
decision-making. All choice are made by him. Because of this, conflicts and
quarrels in operations of certain large-scale businesses.
4. Financial operations are not complicated. As this type of business is small-scale,
financial operations are not as complicated as the financial operations of certain
large-scale businesses.
5. The owner acquires all the profits. It is one of the best advantages of single
proprietorship. The owner has all the freedom to enjoy his profit, without having
it divided or shared with other stakeholders.

Disadvantages of sole proprietorship

The following are the disadvantages of sole proprietorship:

1. Limited ability to raise capital. Since single proprietor businesses are mostly
small, the limitation of its funds serves as a disadvantage, especially so that the
capital owned by the proprietor is the only funds which he can use to operate
the business.
2. The sole proprietor has unlimited liability. This means that the owner of the
business risks not only the assets of his small enterprise, but also his other
personal assets, such as his land, bank deposits and other personal properties,
which are not part of his business. In case of loss, such assets are subject to
financial claims by his creditors.
3. Limited ability to expand. This is due to the business’ limited capital. In most
cases, operations are limited only to areas in which the sole proprietor has
expertise. Not all proprietors are flexible, this is what is required in business
expansion.
4. Business is entirely a responsibility of the owner. The owner has no one to share
the burden of decision making and losses he might incur. Whatever happens to
the business, the owner is only the person to blame.

Partnership
Partnership is a business organization that is an association of at least two or more
persons who agree to place money, property or industry in a common fund with the
aim of sharing the profits among themselves. In addition, a partnership agreement can
be oral or written, although Philippine law requires a written agreement when real
property is involved, or when a limited partnership is being established.

Organizing a Partnership (Mejorada 1999)

 Register the business name (Department of Trade & Industry)

 Have the partnership agreement (Articles of Co-partnership) notarized and
registered with the SEC.
 Obtain a tax identification number for the partnership from the BIR.
 Obtain pertinent municipal licenses from the local government.
 Obtain the VAT or non-VAT number from the BIR.
 Register books of accounts (simplified bookkeeping records or journals and
ledger) and the business forms to be used (sales invoices, cash invoices, official
receipts, etc.) with the BIR.

Contents of Articles of Co-partnership (Mejorada 1999)

The following are the contents of the Articles of Co-partnership

 Name the partnership

 Names of the partners
 Place of business
 Effective date if the partnership
 Nature of business
 Investment of each partner and corresponding capital credit
 Duration of the contract
 Rights, powers, and duties of the partners
 Accounting period
 Manner of dividing profits and losses
 Liabilities of the partners for partnership debts
 Compensation for services offered by partners
 Treatment of partners’ additional investments and withdrawals
 Procedures for settlement of partner’s interest upon dissolution of partnership
  Provision for settlement of disputes

Types of Partners

Partners can be classified according to the following:

1. Based on their contribution

A capitalist partner is one that provide assets, such as money and property, to be
utilized as the starting capital of the business.

An industrial partner is one that swear to give services or labor to the operation
of the business. He is usually the “hands-on” partner in the business, and he is
involved in various aspects of its operation.

A capitalist-industrial partner is one that pledges money and property as the

staring capital of the business, as well as his services. He is the one that provides
the money, and at the same time he is also “hands-on” in the operations of the
business.

2. Based on their liability for partnership debts

A general partner is one who is liable for partnership problems, particularly the
debts of the business. His liability for business debts extends to his personal
property after partnership assets are exhausted.

A limited partner is one whose liability for partnership problems (for instance his
debts) is limited. His liability is only to the extent of his capital contribution.

Advantages of a partnership

The following are the advantages of partnership:

1. Easy to form. The requirements are technically the same with sole
proprietorship. The only additional in the requirements is the partnership
agreement. Unlike a corporation, there are lesser requirements to accomplish in
forming and maintaining a partnership business.
 2. Flexibility of operations. There are only few owners in a partnership business.
That is why if there are certain concerns that need to be addressed, there is no
delay in decision making because it can easily be solved by the partners.
Agreements and resolutions as to business matters are immediately decided by
the partners.
3. Efficiency in operations. Simply put, “two heads are better than one.” There is
better management because of the presence of more participants in the
operation of business. With the presence of the partners, more ideas will are also
applied in the operation of the business.

4. Partners are expected to have great interest in the operation of the partnership.
Partners have their own areas of interest and responsibility, which helps in the
smooth operation of the business. The unlimited liability of the partners also
encourages their interest in participating in the venture.

5. Possibility of bigger resources. Financial institutions may extend bigger loans to

partnerships considering the combined resources of the partners. Thus, more
capital can be used in production.

Disadvantages of partnership

The following are the disadvantages of partnership:

1. Partners have unlimited liability for partnership debts. This is one of the identical
disadvantages of single proprietorship and partnership. Partners face unlimited
liability for partnership debts. Partners may not only put their combined money
and property at risk, but also their individual assets as well.

2. It has a limited life or it lacks stability. Partnership is unstable. Being a contract

between the partners, it is dissolved based on their agreement, or upon the
withdrawal, incapacity or death of a partner, or for other causes which
terminates a contract.

3. Limited ability to raise capital. The amount of capital depends on how much can
be contributed by the partners. Thus, there is also limitation to raise funds for
the business.
4. Conflicts and quarrels between/among partners. Conflicts or quarrels are the
main reason why partnership is unstable. Rules, regulations, policies, number of
 hours in the area, responsibility, decision making, agreements and profit
distribution are just some cause of conflicts and quarrel between the partners.

Corporation

Section 2 of the Corporation Code defines a corporation as follows:

“A corporation is an artificial being created by operation of lay having the right of

succession and the powers, attributes and properties expressly authorized by law or
incidents to its existence” (private corporations are government by the Corporation
Code of the Philippines, per Batas Pambasa Blg. 68)

A corporation is a form of business organization in which the owners (known as

stockholders) have an undivided ownership share in the assets of the corporation upon
its dissolution; and a share in its profits corresponding to the amount of shares of stock
which they own.

A corporation has specific objectives in carrying out the business, in accordance with a
charter or articles of incorporation. This charter is a written document containing the
names of the original incorporators, their initial share in stockownership, and the
objectives and activities of the corporation.

Organizing a Corporation (Mejorada 1999)

 Verification of corporate names with SEC.

 Drafting and execution of the Articles of Incorporation
 Deposit of cash received for subscribed shares of stocks in a banking institution
in the name of the temporary treasurer, in trust for and to the credit of the
corporation.
 Filing of the Articles of Incorporation together with the following.
o Treasurer’s affidavit
o Statement of assets and liabilities of the proposed corporation
o Authority to verify bank deposits
o Certificate of deposit of cash paid for subscription
o Personal information sheet of the incorporators
o Commitment to change corporate name if it is found similar to another
corporate name
 Payment of filing and publication fees
  Issuance by SEC of the certificate of incorporation
 Registration of the corporate name with the DTI
 Obtaining municipal licenses from the local government
 Obtaining the VAT or Non-VAT account number from the BIR
 Registration with BIR books of accounts and accountable forms.

Contents of Articles of Incorporation (Section 14 of the Corporation Code)

The following are the contents of Articles of Incorporation as provided under Section 14
of the Corporation Code:

 Name of the corporation

 The specific purposes for which the corporation is to be located.
 The term for which the corporation is to exist
 The names, nationalities and residences of the incorporators.
 The number of directors or trustees, which shall not be less than five (5) nor
more than fifteen (15).
 The names corporation, the amount of its authorized capital stock in lawful
money of the Philippines, the number of shares into which it is divided. Together
with its values on par.
 If it is Stock Corporation, the amount of its authorized capital stock in lawful
money of the Philippines, the number of shares into which it is divided. Together
with its values on par.
 It if is non-stock corporation, the amount of its capital, the names, nationalities
and residences of the contributors and the amount contributed by each.
 Such other matters as are not inconsistent with law and which the incorporators
may deem necessary and convenient.

By-Law

It may be defined as the rules of action for the internal government of a corporation
and for the government of its officers, stockholders and members. All corporation
formed under the Corporations Code of the Philippines are required to adopt a code by-
laws within one month after its corporate charter from the Securities and Exchange
Commission (SEC). By-laws shall be effective only upon issuance by the SEC of a
certification that the by-laws are not inconsistent with the provisions of the Corporation
Code.
  The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees.
 The time and manner of calling and conducting regular or special meetings of
the stockholders or members.
 The require quorum in meetings of stockholders or members and the manner of
voting therein.
 The form of proxies of stockholders and members and the manner of voting
therein.
 The qualification, duties and compensation of directors or trustees and officers.
 The time for holding the annual election of directors or trustees and the mode or
manner of giving notice thereof.
 The manner election or appointment and the term of office of all officers other
than directors or trustees.
 In the case of Stock Corporation, the manner of issuing certificates.
 The penalties for violation of the by-laws.
 Other matters that may be necessary for the proper and convenient transaction
of its corporate business and affairs.

Right of Stockholders

Stockholders of corporation have the following rights:

 Right to attend and vote in person or by proxy at stockholder’s meetings.

(Sec.50)
 Right to receive dividends when declared. (Sec.43)
 Right to inspect corporate books and records and to receive financial report of
the corporation’s operations. (Secs. 74 and 75)
 Right to pre-emption in the issue of shares. (Sec.39)
 Right to elect and remove directors. (Secs. 24 and 28)
 Right to approve certain corporate acts. (Secs. 49-53)
 Right to issuance of certificate of stock or other evidence of stock ownership and
be registered as shareholders. (Secs 63)
 Right to transfer of stock on the corporate books. (Secs 63)
 Right to participate in the distribution of corporation assets upon dissolution.
(Sec 118-119)
 Right to adopt and amend or cancel the by-laws or adopt news by-laws. (Secs 46
and 48)
  Right to compel the calling of meeting of stockholders when for any cause there
is no person authorized to call a meeting. (Sec 50)
 Right to enter into a voting trust agreement. (Sec. 59)
 Right to recover stock unlawfully sold for delinquency. (Sec. 69)
 Right to bring individual and representative or derivative suits.
 Right to demand payment of the value of his shares and withdraw from the
corporation in certain cases. (Secs. 41 and 81)
 Right to have the corporation voluntarily dissolved. (Secs. 118-119)
Advantages of corporation

The following are the advantages of a corporation:

1. It has a legal capacity. The presence of articles of incorporation granting the

corporation a separate juridical personality.

2. It has continued and more or less permanent existence. The life span of a
corporation is 50 years, and subject to renewal for another 50 years. The death
or withdrawal of some officers, stockholders or members does not affect the life
of the corporation.

3. Management is centralized. The corporation’s management is centralized, and

lodged with the board of directors or trustees. The board is the decision-making
body of the corporation. It is also centralized because the corporation is always
guided by the provisions contained in the articles of incorporation.

4. It has the most efficient management. The creation, organization, management

and dissolution processes of a corporation are standardized in spite of its huge
resources and large-scale operation. All these are primarily governed by the
Corporation Code of the Philippines, and secondarily provided for under the
articles of incorporation.

5. Shareholders have limited liability. In case the corporation becomes bankrupt,

only capital contribution of the shareholders/members are effected. The personal
properties of the creditors of the corporation.

6. Shareholders’ freedom. Shareholders are not general agents of the corporation

and can transfer their shareholdings without the consent of other shareholders.
 7. Ability to raise more capital. Corporation has the ability to raise more capital,
allowing it to undertake more expansive financial ventures. It has the most
effective means of raising money capital for its operations-selling stocks and
bonds. Stocks are certificates of ownership while bonds are certificates of
indebtedness.

Disadvantages of corporation

The following are the disadvantages of a corporation:

1. Complicated to maintain and not easy to organize. Aside from complying with
capital requirements, there are many paper works involved in securing a charter.
It also takes a longer time to have an approval from the SEC.

2. Government intervention. It is subject to a greater degree of governmental

control and supervision. The government is keen in all the operations of a
corporation like tax dues, creation of commodities and employment. It is also
subject to annual and/or quarterly reportorial requirements.

3. Subject to higher tax. It is subject to higher tax rate. Corporate income tax is
fixed at 30%, whereas for individuals, the rate range from 0% to 32%. With the
progressive tax system by the government, given the huge revenue of the
corporation, they are required to pay higher percentage of tax.

4. It has limited powers. A corporation is guided by the articles of incorporation.

Thus, its operations can only revolve within the activities expressly or impliedly
allowed by its articles.

5. Abuses of corporation officials. Corporate directors and officials may abuse their
powers, especially because of the minimum supervision of stockholders.
6. Some corporation are engaged in questionable activities. Some corporations
engaged in questionable activities just only to pursue their own interest which is
to earn profit, regardless of hurting others in the process. For example, they sell
worthless securities, sell substandard goods or pollute the environment. In short,
they do not comply with their social responsibility.

7. There is a very impersonal or formal relationship between the officers and

employees of a corporation. In sole proprietorship and partnership, everybody
 knows everybody; while in a corporation, it is possible that stockholders, as well
as officers and directors, are not familiar with each other.

Classification of Corporations

1. Based on nature of its capital

A stock corporation is one wherein the capital is in the form of shares of stock.
You need to buy the shares to be part of the corporation. At the end, the
corporation earns profits and distributes it to the shareholders in the nature of
dividends.

A non-stock corporation is a corporation which is open to all interested. There is

no dividend distributed among members, trustees or heads.

2. Based on purposes

A public corporation is owned, formed, and organized by the government.

A private corporation is owned, formed and organized by private owners or

businesses.

3. Based on relation to another corporation

A parent corporation is one which has controlling interest (more than 50%) on
another corporation so that it has the power either, directly or indirectly, to elect
the majority of the directors of such other corporation.

A subsidiary corporation is the investor corporation in which the parent

corporation has controlling interest.

4. Based on suits of corporation

A domestic corporation is a corporation under Philippines Law.

A foreign corporation is one that is formed, organized or existing under the laws
of another country.
 5. Based on whether they want to open in public or not

A close corporation is limited to selected persons or members of a family.

An open corporation is open to any person who may wish to become a

stockholder or member thereof.

Voting in a Corporation

In a stock corporation, the manner of voting is called cumulative voting-where a

stockholder is entitled to cast votes equal to the number of shares he owns multiplied
by the number of directors or trustees to be elected.

In a non-stock corporation, every member may cast as many votes as there are
trustees to be elected but may not cast more than one vote for one candidate, unless
cumulative voting is authorized under the articles of incorporation.

Categories of Shares of Stock

1. Common stock

Common stock represents the basic issue of shares, and has all the basic rights
of share so that it is often referred to as the basic ownership in a corporation.

2. Preferred stock

Preferred stock is a type having certain preferences over common stock. These
preferences may be in the distribution of dividends and/or corporate assets,
upon dissolution of the corporation. If dividends have been declared by the
company, the preferred stockholders are prioritized to receive it first.

3. Class A shares
These are the available stocks offered to Filipino shareholders.
4. Class B shares
These are the available stock offered to foreign investors.

5. Par Value shares

 This refers to shares capital that have been assigned a definite or fixed value in
the articles of incorporation, so as to fix its minimum subscription or original
issue price.

6. No par value shares

No par values are shares which have not been assigned a definite or fixed value.

7. Founders’ shares
Founder’s shares are those classified, as such in the articles of incorporation and
may be given certain rights and privileges not enjoyed by other stockholders. It
is usually given to incorporators-the formators of the corporation.

Dividends

It is also called as the distributed profits of the corporation. It represents the

corporation’s profit, which are distributed to stockholders according to the proportionate
interest of their shareholding.

Kinds of Dividends

1. Cash
This is paid in cash to the stockholders.

2. Property
This is in the form of non-cash assets of corporation.

3. Stock
This is the dividend in the form of stocks of the issuing corporation

4. Scrip
The dividend in the form of promissory notes indicating the kind of benefits
the stockholders shall be entitled to receive in the future (cash, non-cash,
stock or some other form of dividend).

5. Bond
 This is in the form of bonds of the company.

6. Liquidating
This refers to return of capital by a corporation.

Cooperatives

Under the Presidential Decree No. 175, a cooperative is defined as follows:

“Only organizations composed primarily of small producers and consumers who

voluntarily join together to form business enterprises which they themselves own,
control and patronize.”

The government in its effort to promote the organization of more cooperatives

throughout the country has extended several powers and privileges (like tax
exemptions) to cooperatives.

The Cooperative Coode of the Philippines was created in 1990, by virtue of Republic Act
No. 6938, which serves as the legal basis for the operation of all cooperatives in the
country.

Principles of Cooperatives

Every cooperative shall conduct its affairs in accordance with Filipino culture and
experience and the universally accepted principles of cooperation, which include the
following:

1. Open and voluntary membership. Membership is cooperative shall be voluntary

and available to all individuals regardless of their social, political, racial or
religious background or beliefs.
2. Democratic control. Cooperatives are democratic organizations. Their affairs shall
be administered by persons or elected or appointed in a manner agreed upon by
the members. Members of primary cooperatives shall have equal voting rights on
a one-member-one-vote.

3. Limited interest on capital. The share capital shall receive a strictly limited rate of
interest.
 4. Division of net surplus. Net surplus arising out of the operation of a cooperative
belongs to its members and shall be equitably distributed for cooperative
development, common services, indivisible, in the manner provided in the Code
and in the articles of cooperation and by-laws.

5. Cooperative education. All cooperatives shall make provision for the education of
their members, officers and employees and of the general public based on the
principles of cooperation.

6. Cooperation among cooperatives. All cooperatives, in order to best serve the

interest of their members and communities, shall actively cooperate with other
cooperatives at local, national, and international levels.

Objectives of a Cooperative

The primary objective of every cooperative is to provide goods and services to its
members, and thus enable them to attain increased income and savings, investments,
productivity, and purchasing power and promote among them equitable distribution of
net surplus through maximum utilization of economies of scale, cost-sharing and risk-
sharing without, however, conducting the affairs of the cooperative for eleemosynary or
charitable purposes.

As provided under the Cooperative Code, a cooperative shall provide maximum

economic benefits to its members; teach members efficient ways of doing things in
cooperative manner; propagate cooperative practices and new ideas in business and
management; and allow the lower income groups to increase their ownership in the
wealth of this nation.

Similarities between a cooperative and a corporation

Factors of production are privately owned and managed. They both on business
efficiency to survive in a competitive market. Also, their activities and operations are
regulated and supervised by the government. Lastly, they both enjoy a reasonable
degree of economic freedom.

Differences between a cooperative and a corporation

A cooperative is primarily organized for service while a corporation’s purpose is mainly
for profit. Membership in a cooperative is open and voluntary, while in a corporation,
membership is restricted. Management of a cooperative is more democratic. It is one
man one vote, with no proxy voting. In the case of a corporation, it is one share, one
vote and more shares, more votes. Moreover, savings or net profits are refunded to the
members of a cooperative on the basis of their individual patronage, while in a
corporation; profits are distributed to stockholders on the basis of the number of
shares.
THE MARKET STRUCTURES

The previous chapter discusses the different types and classifications of business
organizations. These types of business organizations are identified according to the
number of owners of the business.

This chapter identifies the different types of market structure. Market structure is a
classification system for the key traits of a market, including the number of firms, the
similarity of the products they sell, and the ease of entry into and exit from the market
structure. In particular we will look into the characteristics of each with the end in view
of distinguishing one from the other.

TYPES OF MARKET STRUCTURE

There are four major type of market structure, namely: (1) perfect competition, (2)
monopoly, (3) monopolistic competition, and (4) oligopoly. We discuss them individually
below.

Perfect Competition

Perfect, or pure, competition is a market structure characterized by (1) a large number

of small firms, (2) homogeneous product, and (3) very easy entry or exit from the
market. Let us discuss each of these characteristics.

Large number of small firms. One of the characteristics of a perfectly competitive

market is that it is composed of many firms and buyers, that is, a large number of
independently-acting firms and buyers, each firms and buyer being sufficiently small to
be unable to influence the price of product transacted in the market. How many sellers
make up a large number? And, how small is a small firm? Certainly, one, two, ten,
fifteen or even one hundred firms in a market would not be a large number. In fact,
under perfect competition, the exact number cannot be determined. This condition is
fulfilled only when each firm is a market has no significant share of total output, and
therefore, no ability to affect the product’s price. Each firm or producer acts
independently rather than coordinating decisions collectively. For instance, there are
thousands of vegetable farmers throughout the Philippines. If any single farmer raises
the price of his vegetable, the going market price for vegetables in the market will not
be unaffected.
Homogeneous product. In a perfectly competitive market, the products offered by the
competing firms are identical by buyers who have no preference between the products
of various producers. In other words, all firms produce a standardized or homogeneous
product. Thus, the rice produced by farmers in Nueva Ecija is similar to the rice
produced by farmers in Bohol. More specifically, Pedro’s rice is identical with Juan’s rice.
This assumption rules out rivalry among firms in advertising and quality differences.

Very easy entry and exit. This means that there are no barriers to entry or impediments
to the exit of existing sellers. That is, new firms face no barriers to entry. Barriers can
be in the form of financial, technical, or government imposed barriers such as licenses,
patents, permits, copyrights, etc. anyone who wishes to plant tomatoes or sweet potato
needs only a plot of land.

However, in the real world, no market exactly fits the three assumptions of perfect
competition. The perfectly competitive market structure is only a theoretical or ideal
model, but some actual markets do approximate the model fairly closely. Typical
example of this type of market structure is the agricultural sector or farm products
markets.

Monopoly

Monopoly is the opposite extreme of perfect competition. Under monopoly, the

consumer has only two choices – either buy the monopolist’s product or none at all.
Monopoly is a market structure characterized by (1) a single seller or producer, (2) a
unique produce, and (3) impossible entry into the market. Unlike perfect competition,
there are no close substitutes for the monopolist’s product.

Single seller or producer. A monopoly market is comprised of a single supplier selling to

a multitude of small, independently-acting buyers. In other words, a monopoly means
that a single firm is the industry. One firm provides the total supply of a product in a
given market. Local monopolies are more common real-world approximations of the
model than national or world market monopolies. For example, MERALCO is a local
electric power provider in Metro Manila and nearby provinces, while Manila Water is the
distributor of water to the residents of the northern areas of Metro Manila. Nationality,
the armed forces provide military service to the entire country.
Unique product. A unique product means that there are no close substitutes for the
monopolist’s product. As such, the monopolist faces little or no competition. In reality,
however, there are few, if any, products that have no close substitutes. For example,
buying a generator or using a gas lamp is a substitute for MERALCO. Similarly, putting a
deep well can be a substitute of Manila Water.

Impossible entry. Barriers to entry are so severe in a monopoly so that it is impossible

for new firms to enter the market. In other words, extremely high barriers make it very
difficult or impossible for new firms to enter an industry. Barriers to entry include (1)
sole ownership of a vital resource, (2) legal barriers like government franchises and
licenses, and (3) economies of scale.

Monopolistic Competition

Monopolistic completion is a type of market structure characterized by (1) many small

firms, (2) differentiated products, and (3) easy market entry and exit. Following is a
brief description of each characteristic of a monopolistically competitive market.

Many small seller. Monopolistically competitive market is comprised of a large number

of independently-acting firms and buyers. However, under monopolistic competition,
just like under perfect competition, the exact number of firms cannot be determined.
We can say therefore that the many-sellers condition is met when each firm is so small
relative to the total market that its pricing decisions have a negligible effect on the
market price. For instance, Don Pedro owns a seafood restaurant at the Manila Bay
area. He assumes that he can set prices slightly higher or improve services
independently without fear that his competitors will react by also changing their prices
or giving better service. In such a case, if any single seafood restaurant raises its
prices, the going market price for seafood dinners increases by a negligible amount.

Differentiated product. The products offered by competing firms under a

monopolistically competitive market are differentiated from each other in one or more
respects. In fact, this is the key feature of monopolistic competition. Product
differentiation is the process of creating real or apparent differences between goods
and services sold in the market. A differentiated product has close, but not perfect,
substitutes. Although the products of each firm are highly similar, the consumer views
them as somewhat different or distinct. Although there are several seafood restaurants
along the Manila Bay area, they are not at all the same. They differ in location,
atmosphere, quality of food, type of menu offered, quality of service, etc.

Product differentiation can be real or imagined. It does not matter which is true so long
as consumers believe such differences exist. In our previous example, many customers
think that Don Pedro’s seafood restaurant is the best along the Manila Bay area
although there are other restaurants that offer a similar product. The importance of this
viewpoint, therefore, is that consumers are willing to pay slightly high price for Don
Pedro’s seafood.

Our example makes clear that under monopolistic competition rivalry centers on non-
price factors in addition to price competition. With non-price competition, a firm under
this type of market structure competes, using marketing strategies like advertising,
packaging, product development and innovation, better quality, and better service,
rather than lower price. Non-price is an important characteristic of monopolistic
competition that distinguishes it from perfect completion and monopoly.

Easy entry and exit. In a monopolistically competitive market, there are no barriers to
entry preventing new firms entering the market or obstacles in the way of existing firms
leaving the market. Thus, unlike a monopoly, firms in a monopolistically competitive
market face low barriers to entry. However, entry in perfectly competitive market.
Because monopolistically competitive firms sell differentiated products, it is somewhat
difficult for new firms to become established. For instance, we can establish our own
seafood restaurant along Manila bay since we can easily get business permit, secure a
loan, lease a property, and start serving seafood without too much trouble. However,
our restaurant may have trouble attracting customers because Don Pedro’s seafood
restaurant has established a reputation of being the best seafood restaurant in the
area.

Oligopoly

Oligopoly is a market structure characterized by (1) few seller, (2) either a

homogeneous or a differentiated product, and (3) difficult market entry. Oligopoly, just
like monopolistic competition, is found in real world industries. Let us now examine
each characteristic.

Few sellers. Under oligopoly, the bulk of market supply is in the hands of relatively few
large firms who sell to many small buyers. We can therefore say that oligopoly is
competition ‘among the few’. We are familiar with the ‘Big Three’ oil companies to
mean that these three firms dominate the industry. But what does ‘few firms’ really
mean? As with other market structures, the answer is there is no specific number of
firms that must dominate an industry before it is an oligopoly. Basically, an oligopoly is
a consequence of mutual interdependence, that is, it is a condition in which an action of
one firm may cause a reaction from other firms. In other words, a market structure with
a few powerful firms makes it easier for oligopolists to collude. The large number of
firms under perfect competition and the absence of other firms in monopoly rule our
mutual interdependence and collusion in these market structures. We can therefore say
that the ‘few sellers’ condition is met when these firms are so large relative to the total
market that they can affect the market price.

Homogeneous or differentiated products. In an oligopolistic market, the products

offered by suppliers may be identical or, more commonly, differentiated from each
other in one or more respects. These differences may be of a physical nature, involving
functional features, or may be purely ‘imaginary’ in the sense that artificial differences
are created through advertising and sales promotion. For instance, the unleaded
gasoline of Pilipinas Shell is identical with the unleaded gasoline of Petron or Chevron.
However, cars produced by the major automakers, like Toyota and Ford; are
differentiated products. If such is the case, therefore, buyers in an oligopoly market
may or may not be indifferent as to which seller’s product they buy. In other words, the
unleaded gasoline you buy at a Shell station is no different from that of a Petron
station, so you are indifferent whether you buy your gas from the former or the latter.

Difficult entry. Similar to monopoly, there are formidable barriers of entry which make it
difficult for new firms to enter the market. High barriers to entry in an oligopoly protect
firms from new entrants. These barriers include exclusive financial requirements,
control over essential resource, patent rights, and other legal barriers. But the most
significant barriers to entry in an oligopoly market is economies of scale. For example,
larger oil firms achieve lower average total costs than those incurred by small oil firms
thus, we can see that even with the deregulation policy of the government, still the
dominant players in the industry are the ‘Big Three’.

Special Types of Market Structure

There are special types of market structure. These include (1) bilateral monopoly, (2)
bilateral oligopoly, (3) duopsony, (4) duopoly, and (5) monopsony.
Bilateral monopoly is a market situation comprising one seller (like monopoly) and only
one buyer (like monopsony). Bilateral oligopoly is a market competition with significant
degree of seller concentration (like oligopoly) and a significant degree of buyer
concentration (like oligopoly). Duopsony is a market situation in which there are only
two buyer but many sellers. Duopoly is a subset of oligopoly describing a market
situation in which there are only two suppliers. Lastly, monopsony is a form of buyer
concentration, that is, a market situation in which a single buyer confronts many small
suppliers.