MARKET
advantage in pricing smaller firms out of the market.
a means by which the exchange of goods and services
takes place as a result of buyers and sellers being in
contact with one another, either directly or through
mediating agents or institutions.
defined as the sum total of all the buyers and sellers in
the area or region under consideration.
a set of buyers and sellers, commonly referred to as
agents, who through their interaction, both real and
potential, determine the price of a good, or a set of
goods
MARKET STRUCTURE
a descriptive organizational term for discussing the
economics of the market and other characteristics of a
market.
understood as those characteristics of a market that
influence the behavior and results of the firms working in
that market.
FEATURES OF A MARKET STRUCTURE:
 NUMBER OF FIRMS
The number of firms competing in a market is arguably
the single-most important determinant of profitability of
each firm in the market. If there is only one firm, it is in a
better position to set its price such as each positive
economic profit. However, if there are many firms,
competition makes each firm a price-taker i.e. it must sell
at the prevailing market price or else sell nothing which
forces the market towards zero economic profit.
(including the scale and extent of foreign competition)
 DEGREE OF CONCENTRATION
refers to the extent of the market share held by top firms.
 NATURE OF PRODUCT and ITS SUBSTITUTES
Whether a firm sells a differentiated product is very
important in determining the firm’s ability to charge a
price higher than the market price. If the product is
standardized, it has multiple substitutes which eliminates
a firm’s ability to charge premium for it. However, if the
product is differentiated i.e. there is something such as
brand value, features, advertising, etc. to which the
consumers attach some additional value, the firm may
be able to charge a little more for it.
 ENTRY and EXIT BARRIERS
The extent to which existing firms in a market can restrict
new firms from entering the market is an indicator of
market power. The barriers to entry may arise either
from patents, copyrights, economies of scale, etc.
 DEMAND CURVES
One of the most important factors affecting market
power of a firm is the elasticity of demand of its product
and the nature of its demand curve.
The extent of product differentiation
 COST CURVES
The existence of economies of scale and increasing
returns to scale gravitate a market towards monopoly
and/or oligopoly. It is because when average cost of
production is low, larger firms are able to produce a
product at a lower price which give them considerable
The nature of costs (including the potential for firms to
exploit economies of scale and also the presence of
sunk costs which affects market contestability in the long
term)
TYPES OF A MARKET STRUCTURE
 PERFECT COMPETITION
the efficient market where goods are produced using the
most efficient techniques and the least number of
factors. This market is considered to be unrealistic but it
is nevertheless of special interest for hypothetical and
theoretical reasons.
Perfect competition or competitive markets -also referred
to as pure, or free competition-, expresses the idea of
the combination of a wide range of firms, which freely
enter or leave the market and which considers prices as
information, since each bidder only provides a relative
small share of the good to the market and thus do not
exert a noticeable influence on it. Therefore, perfect
competitors cannot influence the levels of market
clearing prices. Also, buyers are numerous and
disperse, which also means that they cannot influence
prices.
 Free and perfect information: all agents have
perfect knowledge of products and their prices, and
everything else related to them, as well as free
access to this information.
 Perfect factor mobility: all factors should be able to
change so adjustments processes can be carried out
with the greatest efficiency.
 No government intervention: markets should be
left alone as government intervention would only
lead to imbalances in perfectly competitive markets. 
 IMPERFECT COMPETITION
which includes all situations that differ from perfect
competition. Sellers and buyers can influence in the
determination of the price of goods, leading to efficiency
losses.
 Imperfect competition or imperfectly competitive
markets is one in which some of the rules of perfect
competition are not followed. Virtually, all real world
markets follow this model, as in practice, all markets
have some form of imperfection. When dealing with
imperfect competition the equilibrium price can be
influenced by the actions of agents. In imperfect
competition the price of goods can increase above
their marginal cost and thus have customers
decrease their level of purchase, and so reach
inefficient levels of production. Governments try to
avoid these situations and take measures to stop
imperfect competition.
 Imperfect competition includes market structures
such as:
 MONOPOLY
it represents the opposite of perfect competition. This
market is composed of a sole seller who will therefore
have full power to set prices.
All of these features give the monopolist the ability to set
prices with the only limitation of consumers’ willingness
to pay. Therefore, in monopolies, the seller is a price-
maker and consumers will be price-takers.
 OLIGOPOLY
in this case, products are offered by a series of firms.
However, the number of sellers is not large enough to
guarantee perfect competition prices. These markets are
usually studied by analyzing duopolies (there are only
two competitors in the market), since these are easier to
model and the main conclusions can be extrapolated to
oligopolies.
This kind of imperfect competition is characterized by
having a relatively scarce amount of firms, but always
more than one, which produce a homogeneous good.
Due to the small number of firms in the market, the
strategies between firms will be interdependent, thus
implying that the profits of an oligopolistic firm will highly
depend on their competitors’ actions.
MONOPOLY vs MONOPSONY
 The difference between monopoly and
monopsony is primarily in the difference between the
controlling entities. A single buyer dominates a
monopsonized market while an individual seller
controls a monopolized market. Monopsonists are
common to areas where they supply most or all of
the region's jobs.
 Like a monopoly, a monopsony also does not
adhere to standard pricing from balancing supply-
side and demand-side factors. In a monopoly, where
there are few suppliers, the controlling entity can sell
its product at a price of its choosing because buyers
are willing to pay its designated price. In a
monopsony, the controlling body is a buyer. This
buyer may use its size advantage to obtain low
prices because many sellers vie for its business.

 MONOPOLISTIC COMPETITION

This market is formed by a high number of firms which

produce a similar good that can be seen as unique due
to differentiation, that will allow prices to be held up
higher than marginal costs.  In other words, each
producer will be considered as a monopoly thanks to
differentiation, but the whole market is considered as
competitive because the degree of differentiation is not
enough to undermine the possibility of substitution
effects.

IMPERFECT COMPETITION
BUYER’S CONTROL
 OLIGOPSONY
similar to oligopolies, but with buyers. Sellers will have to
deal with the increased negotiating power of the only few
buyers in the market, the oligopsonists.
 The concentration of demand in just a few parties gives
each substantial power over the sellers and can
effectively keep prices down.
 MONOPSONY
it’s similar to a monopoly, but in this case, there are
many firms selling products, but only one buyer, the
monopsonist, who will have full power when negotiating
prices.
Because of their unique position, monopsonies have a
wealth of power. For example, being the primary or only
supplier of jobs in an area, the monopsony has the
power to set wages. In addition, they have bargaining
power as they are able to negotiate prices and terms
with their suppliers.
SUMMARY
 The analysis of market structures is of great
importance when studying microeconomics. How the
market will behave, depending on the number of
buyers or sellers, its dimensions, the existence of
entry and exit barriers, etc. will determine how an
equilibrium is reached. 
 Perfect competition means there is no control over
product price. Firms take market price and produce
the amount of output that maximizes their profits.
 Monopoly and monopolistic competition have market
powers and ability to influence product prices and
develop other competitive strategies that enable
their firms to earn positive economic profits.
 Oligopoly firms have market power derived from
barriers to entry. However, there is a small number
of firms competing with each other, so their behavior
is mutually interdependent.

OLIGOPOLY vs OLIGOPSONY

 In an oligopoly, the control is in the hands of a few

sellers. As long as they stay firm on prices, the
buyers have little negotiating room.

 An oligopsony market sees frequent price wars as

each player works to entice a buyer's business. That
effectively drives the price a down and the quantity
up.

 Getting caught in an oligopsony is known

as "racing to the bottom." Sellers lose the power to
control supply and demand.