MARKET STRUCTURE

What is Market
Structure?

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.
➢ A competitive market forms in response to consumer demands for goods and services.
➢ This market structure creates competition to gain customers, requiring businesses to evaluate
production costs, pricing structure and product quantity.
➢ Competitive markets, and the concept of perfect competition, work to factor the buyer and
seller equally and form strategies based on the market's current supply and demand.
➢ A competitive market is a structure in which no single consumer or producer has the power to
influence the market. Its response to supply and demand fluctuates with the supply curve, a
representation of a product's quantity.
 The Working of Competitive Market
➢ Since a competitive market means the producer must be willing to sell a product according to
what the market pays, supply curves adjust to keep the producer's costs relative to its sales.

➢ In a perfectly competitive market, multiple influences decide market prices and, therefore,
market supply.

➢ In this structure, competitive market producers are price-takers who accept the market price
since independent price changes can cause a sales loss.
In economics, market structures can be understood well by closely
examining an array of factors or features exhibited by different
players. It is common to differentiate these markets across the
following seven distinct features.

1.The industry’s buyer structure

2.The turnover
3.The extent of product differentiation
4.The nature of costs of inputs
5.The number of players in the market
6.Vertical integration extent in the same industry
7.The largest player’s market share
• The structure of an industry refers to factors such
as technology, concentration, and market
conditions.

• Conduct refers to how individual firms behave in

the market; it involves pricing decisions,
advertising decisions, and decisions to invest in
research and development, among other factors.

• Performance refers to the resulting profits and

social welfare that arise in the market.
• The structure–conduct–performance paradigm
views these three aspects of industry as being
integrally related.
 Perfect Competition
Perfect competition occurs when there is a large number of small
companies competing against each other. They sell similar products
(homogeneous), lack price influence over the commodities, and are free to
enter or exit the market.
Consumers in this type of market have full knowledge of the goods being
sold. They are aware of the prices charged on them and the product
branding. In the real world, the pure form of this type of market structure
rarely exists. However, it is useful when comparing companies with similar
features.
 Features of Perfect Competition
•Many Buyers and Sellers – There will always be a huge number of buyers and sellers in this form of
marketplace. The advantage of having a large number of small-sized producers is that they cannot
combine to influence the market price. If the quantity offered by an individual seller is very small
compared to the total market produce, they cannot influence the market price independently.
Similarly, if there are many buyers, then an individual will not have the power to dictate conditions to
the market or influence the price by altering demand for a product. The individual demand will not be
large enough to change the price.

•Homogeneity – The product or service produced by the buyers in a perfectly competitive market
should be homogenous in all respects. There should be no differentiation between them in terms of
quantity, size, taste, etc., so that the products are perfect substitutes for each other. If a seller tries to
charge a higher price for products that are so similar, they will lose their customers immediately.

•Free Entry and Exit – Another condition of a perfectly competitive market is that no artificial
restrictions prevent a firm’s entry, or compel an existing firm to stay put when they want to leave. Their
decision to enter, stay or leave the market depends purely on economic factors.
 Features of Perfect Competition
•Perfect Knowledge – The buyers and sellers have perfect knowledge about the market conditions. The buyers
are aware of the details of the product sold as well as its price. At the same time, the sellers know about the
potential sales of their products at different price points. Since the buyers are already informed about the product,
there is no need for advertising or sales promotion. So firms don’t have to invest a single penny in these activities.
It also helps sellers save on advertising or other marketing activities, which keeps the price of their products low.
•Mobility of Factors of Production – The factors of production like labour, raw materials and capital should have
total mobility under perfect competition. The labour should have the freedom to move from one place (industry,
market or production unit) to another depending on their remuneration. Even the raw materials and capital should
not have any restrictions in movement.
•Transport Cost – In the perfectly competitive market, the costs for transporting goods, services or factors of
production from one place to another is either zero or constant for all sellers. The assumption is that all sellers are
equally near or farther away from the market. Thus, the transport cost is uniform for all of them. The result is that
the overall costs for production and the selling price are the same across the board.
•Uniform Price – There is a single uniform price for all products and services in a perfectly competitive market.
The forces of demand and supply determine it.
 Monopoly
Monopoly refers to a type of market structure in which a single company and its goods
and services dominate the market at all times. In other words, consumers are forced to
buy the product only from a single supplier due to a lack of competition for the supplier
from other market players. The product or service in this context could refer to all kinds
of goods, supplies, commodities, infrastructure, or assets.

Monopolies can be considered as an extreme form of free-market capitalism where

there are no restrictions or restraints of any sort on a particular company, that it
becomes so huge and controls all or nearly all of the market. They have an unfair
advantage over other suppliers, either due to the fact that they are the only provider of
the product or service, or they control the market share or both
 Features of Monopoly
High Barrier to Entry
Sometimes a company has such a strong foothold over the market share for a product that other players are
unable to enter the market. A company also becomes a monopoly by acquiring or killing its competition. Other
barriers of entry could be technological superiority, high capital outlay requirements, economies of scale, superior
distribution network, and cost advantages.

Only Seller
A company becomes a monopoly by becoming the only supplier of a product or service. With no other market
player available to supply the good or service, consumers have no choice but to buy the product or service from the
monopoly.

Price Inelastic Demand

As soon as it becomes the only supplier of the essential good or service, the monopoly has the freedom to
determine the price of the product or service at its discretion without the need to worry about demand. Usually,
monopoly players enjoy price inelastic demand, which means that the demand for the product does not increase or
decrease based on the price.

Lack of Substitutes
A company becomes a monopoly when it sells a product for which there is no substitute. Lack of substitutes makes
the demand for the product relatively inelastic. Monopolies take full advantage of such price inelasticity to maximize
their profits
 Monopolistic Competition
Monopolistic competition definition says that it stands for an industry in which many firms
service similar products which are not a perfect substitute. There are very low barriers to
entry or exit in monopolistic competition. In this competition, one firm decision doesn't
affect the whole industry or another firm. Monopolistic competition is just related to the
business strategy of brand variation.

Monopolistic competition means monopoly plus a perfect competition. This market is a

perfect mixture of monopoly and perfect competition.

If we take the soap brands of India as monopolistic competition examples, it can be easily
revealed the idea of monopolistic competition. Though all the soap brands such as Lux,
Dove, Vivel, Fiama, Pears produce the same item, They contain some different features
from others in their product to make it unique.
 Features of Monopolistic Competition
•A Large Number of Sellers: There are many sellers involved in the market of monopolistic
competition. They also own some small shares of that market.
•Entry-Exit Freedom: Any firm can enter or exit in this industry for monopolistic competition.
They are free to get involved in this or they can also get out of this as per their wish. It is not
necessary to explain the reasons behind it.
•Product Variation: Every brand involved in this industry tries to produce item variation to add
monopoly. They make some small differences so that their product can be unique. All the
products are somewhere different from others. Therefore, the brand can fix the price of the
product as per their choice. It also creates a problem for all the brands as they tend to lose some
customers.
•Non-Price Factors: Besides the price competition, there are some other factors to compete in the
market. The brands attract customers through advertising, product development, extra features,
great service, etc. All the brands promote and take the initiative to make their product better than
other available products in the market.
 Oligopoly

The word Oligopoly is derived from two Greek words – ‘Oligi’ meaning ‘few’ and
‘Polein’ meaning ‘to sell’.

An Oligopoly market situation is also called ‘competition among the few. In other words,
An oligopoly is an industry which is dominated by a few firms. In this market, there are a
few firms which sell homogeneous or differentiated products.

Oligopoly is either perfect or imperfect/differentiated. In India, some examples of an

oligopolistic market are automobiles, cement, steel, aluminum, etc.
 Features of Oligopoly Markets
Few firms
Under Oligopoly, there are a few large firms although the exact number of firms is undefined. Also,
there is severe competition since each firm produces a significant portion of the total output.

Barriers to Entry
Under Oligopoly, a firm can earn super-normal profits in the long run as there are barriers to entry
like patents, licenses, control over crucial raw materials, etc. These barriers prevent the entry of
new firms into the industry.

Non-Price Competition
Firms try to avoid price competition due to the fear of price wars in Oligopoly and hence depend on
non-price methods like advertising, after sales services, warranties, etc. This ensures that firms can
influence demand and build brand recognition.

Interdependence
Under Oligopoly, since a few firms hold a significant share in the total output of the industry, each
firm is affected by the price and output decisions of rival firms. Therefore, there is a lot of
interdependence among firms in an oligopoly. Hence, a firm takes into account the action and
reaction of its competing firms while determining its price and output levels.
 Features of Oligopoly Markets
Nature of the Product
Under oligopoly, the products of the firms are either homogeneous or differentiated.
Selling Costs
Since firms try to avoid price competition and there is a huge interdependence among
firms, selling costs are highly important for competing against rival firms for a larger
market share.
No unique pattern of pricing behavior
Under Oligopoly, firms want to act independently and earn maximum profits on one
hand and cooperate with rivals to remove uncertainty on the other hand.
Depending on their motives, situations in real-life can vary making predicting the pattern
of pricing behavior among firms impossible. The firms can compete or collude with
other firms which can lead to different pricing situations.
https://www.ethicalconsumer.org/technology/global-supply-chain-mobile-phone

https://www.bbc.com/news/world-asia-57018837
 Revenue Structure
Total revenue from the production and sale of a product of a firm is the total quantity of
the product produced and sold multiplied by price of the product.
Thus TR = P*Q ...... ( 1)

(1) where TR stands for total revenue,

(2) P for price and Q for quantity of the product produced and sold.
(3) Average revenue is the revenue earned per unit of output produced and sold.

Average revenue (AR) is equal to price when a firm sells all units of output produced at the
same price (that is, when it is not discriminating prices.

However, it is marginal revenue concept that is of crucial importance in marginal analysis.

Marginal revenue is defined as the extra revenue earned by producing and selling an extra
unit of output.
Questions for practice

Correction in the above question: for quantity 3 the price is 31 not 3

Solution
Producer’s Equilibrium
 Producer’s Equilibrium

Producer’s equilibrium is the level of the output of a commodity which gives the maximum profit to the
producer of the commodity. A firm is in equilibrium if there is no scope for either increasing the profit
income or reducing its loss by changing the quality of the output. Therefore, we have
Profit (π) = Total Revenue – Total Cost = TR – TC
Hence, the output level at which the total revenue minus the total cost is maximum is the equilibrium
level of the output. There are two approaches to arrive at the producer’s equilibrium:
•Total Revenue – Total Cost (TR-TC) Approach
•Marginal Revenue – Marginal Cost (MR-MC) Approach
 TR –TC Approach
According to this approach, the producer’s equilibrium has two conditions:
•The difference between TR and TC is maximum
•Even if one more unit of output is produced, then the profit falls. In other words, the marginal cost becomes
higher than the marginal revenue if one more unit is produced.
In the figure, the X-axis shows the levels of
output and Y-axis shows total costs and total
revenues. TC is the Total Cost Curve and TR is
the Total Revenue Curve. Also, P is the
equilibrium point where the distance
between TR and TC is maximum.
Further, you can see that before the point P’
and after the point P”, TC>TR. Therefore, the
producer must produce between P’P” or
M’M”. At the point P, a tangent drawn to TC is
parallel to TR. In other words, at point P, the
slope of TC is equal to the slope of TR. This
equality is not achieved at any other point.
 MR-MC Approach
The MR-MC approach is derived from the TR-TC approach. The two conditions of equilibrium under the MR-MC
approach are:
•MR = MC
•MC cuts the MR curve from below
If one additional unit of the output is produced, then MR is the gain and MC is the cost to the producer. As long as
MR is greater than MC, it is profitable to produce more. Therefore, the firm has not achieved an equilibrium level of
output where the profit is maximum. This is because the firm can increase its profits by producing more.
On the other hand, if MR is less than MC, then the benefit is less than cost. Therefore, the producer is not in
equilibrium either. He can reduce the production to add to his profits. When MC = MR, the benefit is equal to cost, the
producer is in equilibrium provided that MC becomes greater than MR beyond this level of output.
Therefore, for producer’s equilibrium MC = MR is a necessary condition but not sufficient.
 MC cuts the MR curve from below

While MC = MR is necessary for equilibrium, but it is not sufficient. This is because the producer might
face more than one MC = MR outputs. Out of these, only that output beyond which MC becomes
greater than MR is the equilibrium output.
This is because if MC is greater than MR, then producing beyond MR = MC will reduce the profits. Also,
when it is no longer possible to add profits, the maximum profit level is reached.
On the other hand, if MC is less than MR beyond the MC = MR output, then the producer can add
profits by producing more. Therefore, for the producer’s equilibrium, it is important that MC = MR. Also,
MC should be greater than MR if more output is produced.