LESSON

APPLIED ECONOMICS:

4 Market Structure

What I need to know?

After going to this lesson you are expected to:

 Differentiate various market structures.

 Identify how perfect competition operates.

Content
MARKET STRUCTURE

Market Structure is best defined as the organizational and other characteristics of market. We focus
on those characteristics which affect the nature of competition and pricing – but it is important not to place
too much emphasis simply on the market share of the existing firms in an industry.

1. MONOPOLY

A monopoly is a market structure in which there is only one producer/seller for a product. In other
words, the single business is the industry. Entry into such a market is restricted due to high costs or other
impediments, which may be economic, social or political.

Monopoly is practiced in some provinces in the Philippines. For example, the electric cooperatives,
cable operators, telephone services like Digitel and water utility firms. Due to prohibitive costs of
maintenance, others would not dare to complete.

There is a tendency for a monopolist to maximize profits and being only one in the market, will not
think too much for consumers’ welfare. If monopolies will not be regulated, the cost of energy would be
costing much more now.

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 CHARACTERISTICS OF MONOPOLY

1. Maximizes profits
2. Decides the price of the good or product to be sold, but does so by determining the
quantity in order to demand the price desired by the firm.
3. Other sellers are unable to enter the market of the monopoly.
4. On a monopoly, there is one seller of the good that produces all the output.
5. A monopolist can change the price and quality of the product.

2. OLIGOPOLYO

In an oligopoly, there are only a few firms that make up an industry. This select group of firms
has control over the price and, like a monopoly, an oligopoly has high barriers to entry. The products that
the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing
for market share, are interdependent as a result of market forces.

Oligopoly situations usually invite collusion or a secret agreement between two or more
persons or institutions to achieve certain objectives among the industry’s firms.

CHARACTERISTICS OF OLIGOPOLY

1. Oligopolies are price setters rather than price takers.

2. Barriers to entry are high. The most important barriers are government licenses,
economies of scale, patents, access to expensive complex technology, and strategic
actions by incumbent firms designed to discourage or destroy promising firms.
Additional sources of barriers to entry often result from government regulation favoring
existing firms making it difficult for new firms to enter the market.
3. There are so few firms that the actions of one firm can influence the actions of the
other firm.
4. Product may be homogeneous or differentiated
5. Oligopolies have perfect knowledge of their own cost and demand functions but their
inter-firm information may be complete.

3. PERFECT COMPETITION

Perfect competition is characterized by many buyers and sellers, may products that are
similar in nature and, as a result, many substitute. Perfect competition means there are few, if any, barriers
to entry for new companies, and prices are determined by supply and demand.

CHARACTERISTICS OF PERFECT COMPETITION

1. There is perfect knowledge, with no information failure or time lags in the flow of
information. Knowledge is freely available to all participants, which means that risk-
taking is minimal and the role of the entrepreneur is limited.
2. Given that producers and consumers have perfect knowledge, it is assumed that they
make rational decisions to maximized their self-interest – consumers look to maximize
their utility, and producers look to maximize their profits.
3. There are no barriers to entry into or exit out of the market.
4. Firms produce homogeneous, identical, units of output that are not branded.
5. Each unit of input, such as units of labour, are also homogeneous.

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 6. There are very many firms in the market.

4. MOPOLISTIC COMPETITION

Monopolistic competition is a type of imperfect competition such that one or two producers
sell products that are differentiated from one another as good but not perfect substitutes (such as from
branding, quality, or location).

CHARACTERISTICS OF A MONOPOLISTIC COMPETITION.

1. There are many producers and many consumers in the market, and no business has
total control over the market price.
2. Consumers perceive that there are non-price differences among the competitors’
product.
3. There are few barriers to entry and exit.
4. Producers have a degree of control over price.

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Name: _________________________ Subject Teacher: Mr. Nebochadnezar M. Manzo
Grade/ Track: ___________________

Assessment 1.4 SCORE

DIRECTION: Based on what you have learned regarding market structure, identify the advantages and
disadvantages of Monopoly, Oligopoly, Monopolistic competition, and Perfect Competition. Write down your
answers on the column on each headings:

MARKET STRUCTURE ADVANTAGE DISADVANTAGE

MONOPOLY

OLIGOPOLY

MONOPOLISTIC COMPETITION

PERFECT COMPETITION

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