SHS LESSON 7 Market Models or Structures

To God Be All The Glory!!!
SENIOR HIGH SCHOOL (GRADE 12)

ENTREPRENEURSHIP (Applied Track Subject)
Name : _____________________________ Class Schedule : _________________

Course/Year/Section : _________________ Professor : Dir. Joey Bolok,CESO,MPA
LESSON SEVEN
THE MARKET MODELS OR STRUCTURES
Definition of Terms and Explanation
1. Market
 It is a place where buyers and sellers interact and engage in exchange.
 It is a mechanism through which buyers and sellers interact in order to determine the
price and quantity of a good or a service.
 When buyers wishing to exchange money for a good or service are in contact with
sellers wishing to exchange goods and services for money, a market exists.
 A market may be confined to a specific geographical area, like a certain town where
buyers and sellers meet. A particular area, however, is not necessary for a market to
exist.
2. Product Differentiation is a strategy in which one firm’s product is distinguished from
competing products by means of its design, related services, quality, location, or other attributes
except price.
3. Advertising is the seller’s activities in communicating its message about its product to
potential buyers.
4. Standardized product is a product whose buyers are indifferent to the seller from whom they
purchase it as long as the price charged by all sellers is the same; a product all units of which
are identical and thus are perfect substitutes for each other.
5. Differentiated product is a product that differs physically or in some other way from the
similar products produced by other firms; a product such that buyers are not indifferent to the
seller when the price charged by all sellers is the same.
Table 3 : Characteristics of the Four Basic Market Models/Structures
Market Model
Characteristic Pure Monopolistic Oligopoly Pure Monopoly
Competition Competition
Number of A very large Many Few One
firms number
Type of Standardized Differentiated Standardized Unique; no close
products or differentiated substitutes
Control over None Some, but Limited by Considerable
price within rather mutual
narrow limits interdependence
considerable
with collusion
Conditions of Very easy, Relatively easy Significant Blocked
entry no obstacles obstacles
Nonprice None Considerable Typically a great Mostly public
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competition emphasis on deal, particularly relations advertising

advertising with product
brand names, differentiation
trademarks
Examples Agriculture Retail trade, Steel, Local utilities
dresses, shoes automobiles,
farm
implements,
many
household
appliances
6. Pure or Perfect Competition

 Involves a very large number of firms producing a standardized product (that is, a
product identical to that of other producers, such as corn or cucumbers).
 New firms can enter or exit the industry very easily.
 Pure or perfect competition is a creation of theory.
 It is very difficult, for instance, to eliminate all restraints in the activities of firms.
 Also, tremendous amounts of resources would be needed to maintain perfect knowledge
of market conditions by so many people.
 Impractical as may seem, however, the idea of perfect competition serves to clarify
certain desirable characteristics of the market and all its variations.
 Although pure competition is relatively rare in the real world, this market model is highly
relevant. A few industries more closely approximate pure competition than any other
market structure.
 In particular we can learn much about markets for agricultural goods, fish products,
foreign exchange, basic metals, and stock shares by studying the pure competition
model.
 Also, pure competition is a meaningful starting point for any discussion of price and
output determination. Moreover, the operation of a purely competitive economy provides
a standard, or norm, for evaluating the efficiency of the real-world economy.
 Characteristics :
Very large numbers
 A basic feature of a purely competitive market is the presence of a large number
of independently acting sellers/firms, often offering their products in large national
or international markets. Examples : markets for farm commodities, the stock
market, and the foreign exchange market.
 There is no precise number of as to what constitute “large number”. It may be 50
or 100 firms or even 1,000 firms. The important thing is to note how a firm affects
the supply and market price of the product. Hence, we can consider 50 firms as
already pure competition when neither of them can substantially have an effect
on market conditions.
Homogenous goods and services

 Purely competitive firms produce a standardized (identical or homogenous)
product.
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 This means that they are identical or at least so much alike that buyers do not
mind buying from any firm.
 As long as the price is the same, consumers will be indifferent about which seller
to buy the product from.
 Buyers view products of firms B,C,D and E as perfect substitutes for the product
of firm A. Because purely competitive firms sell standardized products, they
make no attempts to differentiate their products and do not engage in other forms
of non-price competition.
 Buyers, however, will not buy from a firm whose price is higher than the rival
firms.
“Price takers”
 The buyer and the seller are without power to change the going market price of
the product.
 The purchases made by the individual buyer constitute only a very small fraction
of the total purchases made by all buyers.
 Therefore, the buyers cannot ask for a reduced price from the seller because of
the existence of many other alternative buyers.
 In the same manner, any individual seller cannot effect changes in the market
price because of the very limited quantity of products he holds.
 In a purely competitive market individual firms exert no significant control over
product price.
 Each firm produces such a small fraction of total output that increasing or
decreasing its output will not perceptibly influence total supply or, therefore,
product price.
 In short, the competitive firm is a price taker: it cannot change market price; it can
only adjust to it. That means that the individual competitive producer is at the
mercy of the market. Firms cannot alter the prevailing price of the product> It
does not have the bargaining power to adjust prices. Hence, a firm takes
whatever price is dictated in the market. Asking a price higher than the market
price would be futile.
 Example: Consumers will not buy from firm A at Php102.05 when its 9999
competitors are selling an identical product, and therefore a perfect substitute, at
Php102 per unit, there is no reason for it to charge a lower price,say,Php101.95,
for to do so would shrink its profit.
Freedom of entry and exit

 The absence of restraints of any kind is an important feature.
 In a purely competitive market, no artificial obstacles bar the entry and exit of
firms.
 New firms can freely enter and existing firms can freely leave purely competitive
industries.
 No significant legal, technological, financial, or other obstacles prohibit new firms
from selling their output in any competitive market.
 Examples of obstacles are permits and licenses required by the government, as
well as price ceilings imposed on commodities.
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 For example, any person desiring to cultivate his land and engage in rice farming
can do as he pleases.
 This feature of a pure competitive is due to the fact that in such a market,
resources are completely mobile. Any firm desiring to enter the industry, can
have easy access to the needed inputs.
Knowledge of Market Conditions

 Buyers, sellers, and resource owners have perfect knowledge of market
conditions.
 Business firms have knowledge of their revenues and cost functions.
 They are also aware of the prices of all resource inputs and of the various
technologies available for producing their outputs.
 Buyers possess information on the prices charged by all firms.
 Resource owners know the prices of inputs bought by all firms.
 Customers are aware of the prices of the product being sold. Likewise, firms
know the quantity of existing supply as well as the prices of inputs.
7. Pure or Perfect Monopoly
 It is that market structure characterized by only one producer of a product.
 A market structure in which one firm is the sole seller of a product or service (for
example, a local electric utility). It exists when a single firm is the sole producer of a
product for which there are no close substitutes.
 Since the entry of additional firms is blocked, one firm constitutes the entire industry.
Because the monopolist produces a unique product, it makes no effort to differentiate its
product.
 Examples of monopolies include firms that supply electricity and water.
 The two perfect types of market structure (perfect competition and perfect monopoly) are
actually opposites.
 In terms of price determination alone, the price of the commodity is set by the
competing firms and buyers in the perfect competition market.
 In pure monopoly, the price is set by the sole seller or the monopolist.
 Since there is no competing seller, the buyer has no choice but to buy the product of the
monopolist.
 It is a very rare situation, however, to find the buyer completely helpless in finding a
substitute. Candles, no matter how inconvenient they are, are still used as substitutes for
electrical lighting.
 If the monopolist’s price became prohibitive and the buyer is hard-pressed to find a
substitute, he may just forego consumption.
 Just like pure competition, pure monopoly does not exist in the real world.
Single seller/firm
 A pure, or absolute, monopoly is an industry in which a single firm is the sole
producer of a specific good or the sole supplier of a service, the firm and the
industry are synonymous.
 Unlike, pure competition where there is rivalry among many firms, in monopoly,
there is virtually no competition.
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Unique product with no close substitutes

 A pure monopoly’s product is unique in that there are no close substitutes.
 A consumer who chooses not to buy the monopolized product must do without it.
 A monopolist sells single or unique good or service. There are no available
substitute goods for the consumer. Take the case of water, for example, being
distributed by Maynilad or Manila Water. There is no alternative for such kind of
utility to which a consumer can instead purchase.
 As a result, buyers are usually left without recourse but to purchase the product
supplied by a monopolists.
Price maker
 The pure monopolist controls the total quantity supplied and thus has
considerable or substantial control over price; it is a price maker. (Unlike the pure
competitor that has no such control and therefore is a price taker.)
 The pure monopolist confronts the usual downward-sloping product demand
curve. It can change its product price by changing the quantity of the product it
supplies.
 Recall that in a competitive market, each firm is insignificant in effecting changes
in prices. Since the firm in monopoly controls the entire supply of goods and
services, it can significantly alter market prices. It does so by substantially
controlling the level of production.
 The monopolist will use this power whenever it is advantageous to do so.
Blocked entry
 A pure monopolist has no immediate competitors because certain barriers keep
potential competitors from entering the industry.
 Those barriers may be economic, technological, legal, or of some other type.
 But entry is totally blocked in pure monopoly.
 These barriers take many forms. A good example of this restriction is the
government itself. In business imbued with public interest, the government
usually requires franchise before a firm is permitted to operate in such areas. In
many instances, the government awards the franchise in an exclusive basis.
Hence, there would be practically no room for other firms to enter these areas of
business.
Non-price competition
 Non-price competition is competition based on distinguishing one’s product by
mean’s of product differentiation and then advertising the distinguished
product to consumers.
 The product produced by a pure monopoly may be either standardized (as with
natural gas and electricity) or differentiated (as with Windows or Frisbees)
 Monopolists that have standardized products engage mainly in public relations
advertising, whereas those with differentiated products sometimes advertise
their products’ attributes.
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8. Monopolistic Competition (Imperfect type)

 It is that type of market structure “where there are a large number of sellers that
produce similar products, but the products are perceived by buyers as different.”
 It is characterized by a relatively large number of sellers producing differentiated
products (clothing, furniture, books).
 Under this market structure, the products of many sellers are identical and even
interchangeable like rice and tomatoes.
 The firms are actually in competition.
 There is widespread nonprice competition, a selling strategy in which one firm tries to
distinguish its product or service from all competing products on the basis of attributes
like design and workmanship (an approach called product differentiation).
 Either entry or exit from monopolistically competitive industries is quite easy.
 The individual firms, however, make it appear that their products are different from one
another. For instance, to achieve the purpose of product differentiation, firms in the
softdrinks industry make “enormous investments in brand identification and preference.”
 The aim of product differentiation is to convince buyers that a certain product is different
from another in terms like quality and style.
 If the seller has succeeded in differentiating his products through advertising, branding,
packaging, or other nonprice means, he can determine his own policies without regard
of the policies of the competitor.
 Policy determination may include price setting.
 Products that are sold under conditions of monopolistic competition include
wristwatches, milk, shoes, clothes, and fast food.
 The first and third characteristics provide the “competitive” aspect of monopolistic
competition. The second characteristic provides the “monopolistic” aspect.
A relatively large number of sellers
 Monopolistic competition is characterized by a fairly large number of firms, say,
25, 35, 60, or 70, not by the hundreds or thousands of firms in pure competition.
 But relatively large number, we refer to a situation where firms operate without
any of them having the capacity to alter market conditions nor for one firm to be
strong enough to elicit reaction from another firm.
 Consequently, monopolistic competition involves:
 Small market shares
- Each firm has a comparatively small percentage of the total market and
consequently has limited control over market price.
 No collusion
- The presence of a relatively large number of firms ensures that collusion
by a group of firms to restrict output and set prices is unlikely.
 Independent action
- With numerous firms in an industry, there is no feeling of interdependence
among them; each firm can determine its own pricing policy without
considering the possible reactions of rival firms.
- A single firm may realize a modest increase in sales by cutting its price,
but the effect of that action on competitors’ sales will be nearly
imperceptible and will probably trigger no response.
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Differentiated products (often promoted by heavy advertising)

 In contrast to pure competition, in which there is standardized product,
monopolistic competition, is distinguished by product differentiation. Products
offered by sellers are differentiated.
 Product differentiation means that products offered by firms in a
monopolistically competitive market are not identical. One is not the same
compared to other available products. It does not, however, require that there are
substantial differences with regard to the physical aspect, quantity or even quality
of the product. Differences among the goods and services of firms may even be
superficial.
 For example, in medicines with the same generic name may be differentiated
with that of the other in terms of their brand name. Thus, we have Gardan and
Ponstan, which are both Mefenamic acid.
 The test, therefore, in product differentiation is in the eyes and minds of the
buyer. It does not matter whether a brand of soap or cigarette is substantially the
same with another, as long as in terms of consumer preference, one is
considered superior as compared to the other.
 Monopolistically competitive firms turn out variations of a particular product. They
produce products with slightly different physical characteristics, offer varying
degrees of customer service, provide varying amounts of locational convenience,
or proclaim special qualities, real or imagined, for their products.
 Aspects of Product Differentiation
 Product Attributes
- Physical differentiation may entail physical or qualitative differentiates in
the products themselves.
- Real differences in functional features, materials, design, and
workmanship are vital aspects of product differentiation.
- Personal computers, for example, differ in terms of storage capacity,
speed, graphic displays, and included software. (refer to notes for more
examples p.461 Mc.Connell Brue)
 Service
- Service and the condition surrounding the sale of a product are forms of
product differentiation too. (refer to notes for more examples p.461
Mc.Connell Brue)
- The prestige appeal of a store, the courteousness and helpfulness of
clerks, the firm’s reputation for servicing or exchanging its products, and
the credit it makes available are all service aspects of product
differentiation.
 Location
- Products may also be differentiated through the location and accessibility
of the stores that sell them. (refer to notes for more examples p.461
Mc.Connell Brue)
 Brand Names and Packaging
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- Products differentiation may also be created through the use of brand

names and trademarks, packaging, and celebrity connections. (refer to
notes for more examples p.461 Mc.Connell Brue)
 Some Control Over Price
- Despite the relatively large number of firms, monopolistic competitors do
have some control over their product prices because of product
differentiation.
- If consumers prefer the products of specific sellers, then within limits they
will pay more to satisfy their preferences.
- Sellers and buyers are not linked randomly, as in a purely competitive
market. But the monopolistic competitor’s control over price is quite
limited, since there are numerous potential substitutes for its product.
 Advertising
- The expense and effort involved in product differentiation would be
wasted if consumers were not made aware of product differences. Thus,
monopolistic competitors advertise their products, often heavily.
- The goal of product differentiation and advertising – so called nonprice
competition – is to make price less of a factor in consumer purchases and
make product differences a greater factor. If successful, the firm’s
demand curve will shift to the right and will become less elastic.
Easy entry, and exit from, the industry

 Entry into monopolistically competitive industries is relatively easy compared to
oligopoly or pure monopoly. Because monopolistic competitors are typically small
firms, both absolutely and relatively, economies of scale are few and capital
requirements are low.
 On the other hand, compared with pure competition, financial barriers may result
from the need to develop and advertise a product that differs from rivals’
products. Some firms may hold patents on their products or copyrights on their
brand names, making it difficult and costly for other firms to imitate them.
 Exit from the monopolistically competitive industries is relatively easy. Nothing
prevents an unprofitable monopolistic competitor from holding a gang-out-of-
business sale and shutting down.
No Collusion
 Considering the number of firms in the industry, there is collusion in
monopolistically competitive market.
 By collusion we refer to a situation where firms come to an agreement regarding
the level of output thereby affecting price.
 The most visible manifestation of collusion is price fixing, although other
collective action may also be resorted to at the expense of the consuming public.
 The absence of collusion in monopolistic competition distinguishes it from
oligopoly, where such actions are likely to happen.
9. Oligopoly (Imperfect type)
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 It is that market structure in which there are a limited number of firms competing for a
given industry.
 It involves only a few sellers of a standardized or differentiated product; so each firm is
affected by the decisions of its rivals and must take those decisions into account in
determining its own price and output.
 The products of oligopolists are homogenous or identical. Examples of these products
are gasoline, cement, steel, automobiles, and cigarettes.
 Firms that would want to compete in the oligopolistic market are barred by high initial
investment. This is one of the reasons why there are only a few sellers in the
oligopolistic market.
 Other market entry obstacles include technical knowhow, patent rights and the like.
 When an oligopolist sets his price, he must consider the reactions of the other sellers.
He cannot set a lower price and reap the benefit of higher sales volume. If he does it,
competitors retaliate with lower prices also. This will bring them all back to their original
positions and with lower profits at that.
 As the action of one will affect the others, it is more likely, therefore, that oligopolists will
set prices in collusion with one another.
 Characteristics:
Few large number of firms
 Oligopoly is characterized by the presence of few large number of firms.
 While there is no definite number as to what constitutes a few number of firms,
the industry is an oligopoly if it is recognized to be dominated by few large or
sizable companies, say 3, 4 or even 5.
 Even if the industry consists of say 60 or 70 firms, if 4 or 5 of these accounts for
a significant market share of say 60% or 75%, then such an industry is an
oligopoly.
 This is the case obtaining in the Philippine Oil Industry. As we know, prior to
deregulation, the industry consisted of three firms. After deregulation, the
industry saw the entry of new players totaling about 60. However, we noted
earlier that despite this, the industry remained to be dominated by the three oil
companies.
 When you hear a term, such as “Big Three”, “Big Four”, or “Big Six” you can be
sure it refers to an oligopolistic industry.
Homogenous (Standardized) or differentiated product

 In pure competition, the product offered by firms are standardized.
 In contrast, in monopolistic competition, firms produce differentiated products.
 An oligopoly may be either a homogenous oligopoly (an oligopoly in which the
firms produce a standardized product.) or differentiated oligopoly (an oligopoly in
which the firms produce a differentiated product.).In the case of the few sellers in
oligopoly, they maybe selling either standardized or differentiated products.
 Many industrial products (steel, zinc, copper, aluminum, lead, cement, industrial
alcohol, crude oil, gasoline, diesel, etc..) are virtually standardized products that
are produced in oligopolies.
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 Alternatively, many consumers goods industries (automobiles, tires, household

appliances, electronics equipment, breakfast cereals, cigarettes, and many
sporting goods) are differentiated oligopolies.
 Manufacturers differ in the types of autos they assemble, that is why autos are
commonly known by the names of their models. Thus, we have Honda Civic,
Toyota Altis, Mitsubishi Lancer, etc..
 These differentiated oligopolies typically engage in considerable non-price
competition supported by heavy advertising.
Control over prices

 As a consequence of having few sellers in the industry, control over price is
present. This feature is likewise present in monopoly. Monopolists enjoy
substantial control over price as a result of being alone in the industry.
 But as we shall see later, control over price is somewhat limited in oligopoly. This
is because, any price adjustment that one firm will make, certainly gives rise to at
least similar actions by other firms in the industry. Thus, increasing one’s price
may not likely do well for the firm depending on the possible reactions of other
firms.
 Oligopoly is thus characterized by strategic behavior (it simply mean self-
interested behavior that takes into account the reactions of others.) and mutual
interdependence (a situation in which each firm’s profit depends not entirely on
its own price and sales strategies but also on those of the other firms.
 Firms develop and implement price, quality, location, service, and advertising
strategies to “grow their business” and expand their profits.
 So oligopolistic firms base their decisions on how they think rivals will react.
 Examples: In deciding whether to increase the price of its baseball gloves.
Rawlings will try to predict the response of the other major producers, such as
Wilson. Second example: In deciding on its advertising strategy, Burger King will
take into consideration how McDonald’s might react.
Entry barriers
 As in the case of monopoly, entry into the industry is difficult because of many
entry barriers. These barriers are result of the size or number of the firms in the
industry. Since there are only few firms, it is easy to bar the entry of potential
firms. An example of these obstacles preventing the entry of firms ;
 Capitalization to requirements
- In the downstream oil industry, for example, a large amount of capital is
needed to finance the various aspect of the business.
- A closely related barrier below is the large expenditure for capital – the
cost of obtaining necessary plant and equipment- required for entering
certain industries. The jet engine , automobile, commercial aircraft, oil and
petroleum-refining industries, for example, are all characterized by very
high capital requirements.
- The ownership and control of raw materials help explain why oligopoly
exists in many mining industries, including gold, silver, and copper. In the
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electronics, chemicals, photographic equipment, office equipment, and

pharmaceutical industries, patents have served as entry barriers.
- Moreover, oligopolists can preclude the entry of new competitors through
preemptive and retaliatory pricing and advertising strategies.
 Economies of scale
- Economies of scale = reductions in the average total cost of producing a
product as the firm expands the size of plant (its output) in the long run;
the economies of mass production.
- Oligopoly industries usually involve large-scale operations.
- Economies of scale are important entry barriers in a number of
oligopolistic industries, such as aircraft, rubber, and copper industries. In
those industries, three or four firms might each have sufficient sales to
achieve economies of scale, but new firms would have such a small
market share that they could not do so. They would then be high-cost
producers, and as such they could not survive.
 Non-price competition
- An earlier author suggests that advertising is a matter of “life and death”
for firms in the industry.
Interdependence
 The decisions made by one firm are dependent upon the behavior of other firms,
especially competing firms. Firms are sensitive to the action of each other. There
is no independent action as in the case of monopolistic competition.
 For example, in deciding to increase price, a firm must borne in mind their
possible repercussions. One possible outcome of such an increase in price
maybe for other firms to likewise do the same. That is why, we need not be
surprise when Shell, for example, announce a price-hike effective midnight and
the other oil companies follow either a day or a couple of days after.
 It is because of interdependence that makes oligopoly firm’s control over prices
limited. Also the existence of interdependence makes the analysis of oligopoly
difficult and make this type of market quite different from the three others.
Mergers
 Some oligopolies have emerged mainly through the growth of the dominant firms
in a given industry (examples: breakfast cereals, chewing gum, candy bars).
 But for other industries the route to oligopoly has been through mergers
(examples: steel, in its early history, and, more recently, airlines, banking, and
entertainment).
 The merging, or combining, of two or more competing firms may substantially
increase their market share and this in turn may allow the new firm to achieve
greater economies of scale.
 Another underlying the “urge to merge” is the desire for monopoly power. The
larger firm that results from a merger has greater control over market supply and
thus the price of its product. Also, since it is larger buyer of inputs, it will probably
be able to demand and obtain lower prices (costs) on its production inputs.
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SHS LESSON 7 Market Models or Structures

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To God Be All The Glory!!!

SENIOR HIGH SCHOOL (GRADE 12)

Name : _____________ Class Schedule : _

competition emphasis on deal, particularly relations advertising

6. Pure or Perfect Competition

Homogenous goods and services

Freedom of entry and exit

Knowledge of Market Conditions

Unique product with no close substitutes

8. Monopolistic Competition (Imperfect type)

Differentiated products (often promoted by heavy advertising)

- Products differentiation may also be created through the use of brand

Easy entry, and exit from, the industry

Homogenous (Standardized) or differentiated product

 Alternatively, many consumers goods industries (automobiles, tires, household

Control over prices

electronics, chemicals, photographic equipment, office equipment, and

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