MARKET STRUCTURE

► Refers to the competitive environment in which

buyers and sellers operate

COMPETITION
► the rivalry among various sellers in the market
MARKET
► a situation of diffused, impersonal competition among
sellers who compete to sell their goods among buyers who
use their purchasing power to acquire the available goods
in the market
MARKET STRUCTURE
► In economics, refers to how different industries
are classified and differentiated based on their
degree and nature of competition for goods and
services. It is based on the characteristics that
influence the behavior and outcomes of companies
working in a specific market.
► it shows the relations between sellers
and other sellers, sellers to buyers, or
more
Market Structures
1. Perfect Competition

► with large number of independent sellers

competing each other
► sellers offer the same or identical goods
► easy for new firms to enter and leave the market
► no seller can cause change in the price of a good
► each seller is trying to compete to get more profit
■ Thethan the
rise and fall ofothers
market price depends on total demand or total supply, not on a single seller
Market Structure
2. Monopolistic Competition
► there are many sellers
► Sellers compete among themselves and can differentiate their
goods in terms of quality and branding to look different.
► products are the same but not identical (differentiated)
► there is limited control of price
► The company initially produces many products as the demand
is high. However marginal revenue diminishes as new companies
enter the market with differentiated products affecting demand,
leading to less profit.
Few barriers to
entry and exit
Market Structure
3. Oligopoly

►consists of a small number of large companies that

sell differentiated or identical products
► it is hard for new firms to enter the market
It is hard to beat the firms that have been in the market
because these firms know better.
► can set the price and sometimes sellers would agree on
price
Few big
firms
Market Structure
4. Monopoly
► there is only one producer or seller
► product is unique
► Impossible or very hard for new firms to enter or
exit the market
► monopolist chooses the price or has the power to
set price
► there may or may not be a lot of promotion of the
goods
The Importance of understanding market structure:
As different market structures result in different sets of choices
facing a firm’s decision makers, an understanding of market structure
is a powerful tool in…
► Analyzing issues such as a firm’s pricing of its products and,
more broadly, its potential to increase profitability.
► In the long run, a firm’s profitability will be determined by the
forces associated with the market structure within which it operates.
In a highly competitive market, long-run profits will be driven down
by the forces of competition. In less competitive markets, large
profits are possible even in the long run; in the short run, any
outcome is possible.
Therefore, understanding the forces behind the market structure will
aid the financial analyst in determining firms’ short- and long-term
prospects.
 The features of the 4 types of Market Structures
Perfect Monopolistic Oligopoly Monopoly
Competition Competition
Number of Large Many Few One
Sellers (huge) (several) large firms
Barriers to Very high/
Entry/Exit None/Easy Low/Few High Very
difficult
Type of Homogeneous Homogeneous or Unique/
Homogeneous/
Products but Differentiated No good
Identical
Differentiated substitute
High (by non- Complete
Pricing Power None Limited price factors or
by collusion)
Perfect competition - * The rise and fall of price
depends on the supply and demand of the good or
services