Market Structure

Market structure refers to the Determinants of market structure for a

nature and degree of
competition in the market for
goods and services. The
structures of market both for
goods market and service
(factor) market are determined
by the nature of competition
prevailing in a particular market.
particular good.
(1) The number and nature of sellers.
(2) The number and nature of buyers.
(3) The nature of the product.
(4) The conditions of entry into and exit from
the market.
(5) Economies of scale.

On the basis of competition, a

market can be classified in the
following ways:
1.Perfect Competition (Price
takers)
2.Imperfect Competition
(Price Makers)
a. Monopoly
b. Duopoly
c. Oligopoly
d. Monopolistic Competition
Perfect Competition Market:
A perfectly competitive market is one in which the number of buyers and sellers is very
large, all engaged in buying and selling a homogeneous product without any artificial
restrictions and possessing perfect knowledge of market at a time.

In the words of A. Koutsoyiannis, “Perfect competition is a market structure

characterised by a complete absence of rivalry among the individual firms.”

According to R.G. Lipsey, “Perfect competition is a market structure in which all firms
in an industry are price- takers and in which there is freedom of entry into, and exit
from, industry.”

Characteristics :

(1) Large Number of Buyers and Sellers

(2) Freedom of Entry or Exit of Firms
(3) Homogeneous Product
(4) Absence of Artificial Restrictions
(5) Profit Maximisation Goal
(6) Perfect Mobility of Goods and Factors
(7) Perfect Knowledge of Market Conditions
(9) Absence of Selling Costs
Monopoly Market:
Monopoly is a market situation in which there is only one seller of a product with
barriers to entry of others. The product has no close substitutes. The cross elasticity
of demand with every other product is very low. This means that no other firms
produce a similar product.
According to D. Salvatore, “Monopoly is the form of market organisation in which
there is a single firm selling a commodity for which there are no close substitutes.”
Thus the monopoly firm is itself an industry and the monopolist faces the industry
demand curve.
Characteristics of Monopoly:
1. Under monopoly, there is one producer or seller of a particular product and there
is no differ­ence between a firm and an industry. Under monopoly a firm itself is an
industry.
2. A monopoly may be individual proprietorship or partnership or joint stock
company or a co­operative society or a government company.
3. A monopolist has full control on the supply of a product. Hence, the elasticity of
demand for a monopolist’s product is zero.
4. There is no close substitute of a monopolist’s product in the market. Hence,
under monopoly, the cross elasticity of demand for a monopoly product with some
other good is very low.
5. There are restrictions on the entry of other firms in the area of monopoly product.
6. A monopolist can influence the price of a product. He is a price-maker, not a
price-taker.
7. Pure monopoly is not found in the real world.
8. Monopolist cannot determine both the price and quantity of a product
simultaneously.
9. Monopolist’s demand curve slopes downwards to the right. That is why, a
monopolist can increase his sales only by decreasing the price of his product and
thereby maximise his profit. The marginal revenue curve of a monopolist is below
the average revenue curve and it falls faster than the average revenue curve. This
is because a monopolist has to cut down the price of his product to sell an additional
unit.
Oligopoly:
Oligopoly is a market situation in which there are a few firms selling homogeneous or
differenti­ated products. It is difficult to pinpoint the number of firms in ‘competition
among the few.’ With only a few firms in the market, the action of one firm is likely to
affect the others.
An oligopoly industry produces either a homogeneous product or heterogeneous
products. Pure oligopoly is found primarily among producers of such industrial
products as aluminium, etc. Imperfect oligopoly is found among producers of such
consumer goods as automobiles, soaps and detergents, TVs, rubber etc.
(1) Interdependence
(2) Advertisement
(3) Competition
(4) Barriers to Entry of Firms: (a)
Economies of scale enjoyed by a few large
firms; (b) control over essential and
specialised inputs; (c) high capital
requirements due to plant costs,
advertising costs, etc. (d) exclusive patents
and licenses; and (e) the existence of
unused capacity which makes the industry
unattractive.
(5) Lack of Uniformity in size of firms
(6) Demand Curve
(7) No Unique Pattern of Pricing
Behaviour

Oligopoly market is a market structure

that lies between the monopolistic
competition and a pure monopoly.
Non-Collusive Oligopoly: Sweezy’s
Kinked Demand Curve Model:
One of the important features of oligopoly
market is price rigidity. And to explain the
price rigidity in this market, conventional
demand curve is not used. The idea of
using a non-conventional demand curve to
represent non-collusive oligopoly (i.e.,
where sellers compete with their rivals)
was best explained by Paul Sweezy in
1939. Sweezy uses kinked demand curve
to describe price rigidity in oligopoly market
structure.
The kink in the demand curve stems from
the asymmetric behavioural pattern of
sellers. If a seller increases the price of his
product, the rival sellers will not follow him
so that the first seller loses a considerable
amount of sales. In other words, every
price increase will go unnoticed by rivals.
Open Vs Closed Oligopoly: This classification is made on the basis of freedom
to enter into the new industry. An open Oligopoly is the market situation wherein
firm can enter into the industry any time it wants, whereas, in the case of a closed
Oligopoly, there are certain restrictions that act as a barrier for a new firm to enter
into the industry.
Partial Vs Full Oligopoly: This classification is done on the basis of price
leadership. The partial Oligopoly refers to the market situation, wherein one large
firm dominates the market and is looked upon as a price leader. Whereas in full
Oligopoly, the price leadership is conspicuous by its absence.
Perfect (Pure) Vs Imperfect (Differential) Oligopoly: This classification is made
on the basis of product differentiation. The Oligopoly is perfect or pure when the
firms deal in the homogeneous products. Whereas the Oligopoly is said to be
imperfect, when the firms deal in heterogeneous products, i.e. products that are
close but are not perfect substitutes.
Syndicated Vs Organized Oligopoly: This classification is done on the basis of
a degree of coordination found among the firms. When the firms come together
and sell their products with the common interest is called as a Syndicate
Oligopoly. Whereas, in the case of an Organized Oligopoly, the firms have a
central association for fixing the prices, outputs, and quotas.
Collusive Vs Non-Collusive Oligopoly: This classification is made on the basis of agreement or
understanding between the firms. In Collusive Oligopoly, instead of competing with each other, the
firms come together and with the consensus of all fixes the price and the outputs. Whereas in the
case of a non-collusive Oligopoly, there is a lack of understanding among the firms and they
compete against each other to achieve their respective targets.
Formal collusion Tacit collusion may also occur where firms in the
The most common type of formal collusion is industry follow a set of 'rules of thumb' instead of
through the cartel; where a small number of a price leader. Such rules may be designed to
rival firms, selling a similar product, come to prevent destructive competition and thus maintain
the conclusion that it is in their joint interests longer term profitability, although some short run
to formally collude rather than compete, they profitability may be sacrificed as the rules do not
may establish a cartel arrangement in which require MC and MR to be equated. One such rule
they agree to set an industry price and output of thumb is cost-plus pricing.
which enables them to achieve a common Cost-plus pricing
objective. This is likely to involve the setting of This is also known as average cost pricing, mark-
agreed output quotas for each member in up pricing and full-cost pricing, and empirical
order to maintain the agreed price. evidence suggests that it is the most common
pricing procedure adopted by firms. It involves firms
Informal or tacit collusion setting price by adding a standard percentage profit
The most usual method of tacit collusion margin to average costs, so that:
is price leadership which occurs where one Price = AFC+ AVC + profit margin
firm sets a price which is subsequently Cost-plus pricing is consistent with the idea of
accepted as the market price by the other relatively stable oligopoly prices as, providing costs
producers. There need be no formal or written are stable, prices will also remain stable in the short
agreement for this to happen; it is sufficient run, even though demand might be changing.
that firms believe this to be the best way of Conversely, if costs rise on average by 5%, then
maintaining or increasing their profits. prices in the industry will also be rising by a similar
percentage.
Dominant firm price leadership
This type of price leadership occurs where a firm, probably by virtue of its size comes to
dominate an industry in terms of its power to influence market supply. The dominant firm sets
a price to suit its own needs and the smaller firms then adjust their planned output in line with
the market price that has been set for them. An example of such price leadership is provided
by Ford Motor Company, who have often been the first to raise prices in the car industry.
Barometric price leadership
A barometric price leader need not necessarily be the dominant firm in the industry; rather it
will be a firm, possibly small in size, which is acknowledged by others in the industry as
having an informed insight into current market conditions, perhaps because it employs the
best team of accountants and market analysts. The firm's reputation will therefore enable it to
act as a 'barometer' to others in the industry, and its price movements will be closely followed.
Collusive price leadership
This involves a form of tacit group collusion in which prices within an industry change almost
simultaneously and is linked to price parallelism where there are identical prices and price
movements in a given market. In practice collusive price leadership might be difficult to
distinguish from dominant firm leadership, especially in circumstances where the price leader
is quickly followed.
Monopolistic Competition
Monopolistic competition refers to a market situation where there are many firms
selling a differ­entiated product. “There is competition which is keen, though not
perfect, among many firms making very similar products.”

It’s Features :
(1) Large Number of Sellers
(2) Product Differentiation
(3) Freedom of Entry and Exit of Firms
(4) Nature of Demand Curve
(5) Independent Behaviour
(6) Product Groups
(7) Selling Costs
(8) Non-price Competition
 
Despite barriers to entry of other large-scale firms, many oligopolies face
competition at the margin from many small firms. The reason for this is that the
small firms often produce a specialist product or serve a local market. These
small firms are in a position somewhat like monopolistic competition: they
produce a differentiated product and face few if any entry barriers themselves.

Are the large oligopolistic bakers and the

small bakers catering for the same market?
 Allied Bakeries and British Bakeries , produce bread for a nation-wide market. There ‘plant
bakers' are of a similar size and between them account for about half of the market by value,
with other large bakeries accounting for a further 24 per cent of the market (including
Warburtons, the third largest plant baker). But then there are thousands of small bakeries, often
where the bread is baked in the shop. Their bread is usually more expensive than the mass-
produced bread of the two giants, but they often sell a greater variety of loaves, cakes, etc.,
and many people prefer to buy their bread freshly baked.
In the 1950s and 1960s, the giant bakers gradually captured a larger and larger share of the
market. This was due to technical developments that allowed economies of scale:
developments such as mechanical handling of bread, processes that allowed rapid large-scale
proving of dough, and bulk road tankers for flour. Also, with the development of supermarkets
where people tended to shop for the week, there was a growth in large-volume retail outlets
where there was a demand for wrapped bread with a long sell-by date. These presented real
barriers to the small baker.
But then in the 1970s, the rise in oil prices and hence the rise in transport costs gave a
substantial cost advantage to locally produced bread. What is more, some of the technical
developments of the 1960s were adapted to small-scale baking. Finally there was a shift in
consumer tastes away from mass-produced bread and towards the more individual styles of
bread produced by the small baker.
The effect was a growth in the number of small bakers, who now found that entry barriers were
very small.
In recent years, however, the small baker has faced a new form of competition. This is from the
in-store bakeries in supermarkets. These produce not only the standard loaves, but also the
more specialist breads which were previously produced only by the small bakers. Not to be
outdone, the plant bakers are now also producing a wider range of breads. Life is becoming
harder again for the small baker.