MODULE 8: Market Structures

Learning Outcomes:

At the end of the course, the student is able to:

define market and market structure

describe various forms of market structure
apply the concept of market structures to firm and industry cases.
Teaching-Learning Activity:

In this module, you will get the definition of market structure and their characteristics. Apply the
concept of market structures in identifying the differences of market structures.

Market and and Market System

Markets and prices are key characteristics of the market system. They provide the market system
its ability to coordinate millions of daily economic decisions. Markets are institutions or mechanism
where buyers and sellers exchange goods and services.

Some markets are more sophisticated like shopping malls and real estate markets , or are
complicated like auction markets and stock exchanges. The coverage of markets may be local, national or
international. Markets may involve face-to-face contact between the seller and buyer, or may be
impersonal where they may not see or know each other. Moreover,markets may have one seller to many
sellers, or one buyer to many buyers.

Economists group industries according to four distinct market structures arranged from most
intense to least intense or lack of competition. These are pure competition, monopolistic competition,
oligopoly, and monopoly. The main criteria in classifying markets are:

1. Number of firms in the industry;

2. The nature of good produced or service provided; and
3. The conditions of entry and exit in the industry.

Pure Competition

This market structure involves a large number of sellers producing a homogeneous product. The
product of the firms are identical. Consumers are indifferent whether they buy from one firm or another.
The entry and exit in the industry is easy. Production of agricultural products is an example of this market
structure. In pure competition there are many small firms acting independently to produce a product. They
are so many and so small that they cannot influence the price of the product. They are price takers.

Monopolistic Competition

This market structure is composed of many firms with differentiated products. Entry and exit in
the market is moderately easy. Establishments operating under this market structure may include
restaurants, grocery stores, and many others.
The firms are small and each firm produces a small percentage of the total demand for the
product. They act independently and their large number prevents them to collude to influence price. The
biggest firm assumes price leadership in the market. They are price makers. The firms uses extensive
advertisements and promotion to gain the brand loyalty of the consumers.
However, they try to influence price by producing a different product from those in the industry.
Product differentiation may include changing product attributes, different ways of providing the service,
or different location and accessibility value. These result in a wide array of goods and services.

Oligopoly

This market structure involves few firms producing either standardized product or differentiated
products. In this industry, entry and exit is relatively difficult. Examples are commercial banks, oil firms,
auto car makers and electronic companies.
The kind of product produced under oligopoly is one basis in classifying oligopoly. An oligopoly
may either be homogeneous or differentiated depending whether the firm produced homogeneous or
differentiated products.
 The main attribute of this market structure is that it is composed of few firms dominated by two
to five large producers. When the four largest firms control 40% or more of the total demand for the
product, the industry is considered oligopoly.
The firms are price makers and has mutual interdependence with each other tending to collude or
create a cartel.

Three oligopoly models are identified based on the pricing and output behavior of oligopoly
industries.
1. Non-collusive or kinked demand curve- This type occurs when a firm reacts to a
competitor’s price change by matching the price change or ignoring the price change. Such a non-
collusive firm faces a kinked demand curve where demand is highly elastic above the going price and less
elastic below that price.
2. Collusive Oligopoly- Firms collude by agreeing to fix prices, to divide the market, or to
restrict competition among them.
3. Price Leadership-Practices evolve in this type when the dominant firm, usually the largest or
most efficient firm initiates price changes, and automatically all or almost follow the leader.

Monopoly

There is only one big firm producing unique good or service. The firm is the industry. Entry in
this market structure is blocked so it is very difficult to enter and exit in this industry. The firm has
control on price , so they are price makers.
Entry and exit is blocked and the factors or barriers to entry are:
1. Economies of scale. A firm that enters must enter in a scale that has declining
average total cost with added firm size.
2. Patent and licenses. Legal barriers to entry include patents and government
licenses that grant permission to enter into a business.
3. Ownership or control of essential resource. The right to private property is the
essence of the barrier. Ownership of mineral deposit used in a production
process prevents others from exploiting the resource.
4. Natural Monopolies. Industries in which technology is such that only a single
seller can achieve the lowest possible cost. The government has allowed the
existence of some of these but is regulated. Example those providing
electricity, telephone, and transportation services.

References:

Basic Economics with Taxation and Agrarian Reform Coursebook by Marilou P. Lucas et. al

Managerial Economics by Villegas

Introductory to Macroeconomics by Pagoso et al

Introductory to Microeconomics by Pagoso et al

Economics by Fajardo