Market Structures

Market Structure
• Refers to the competitive environment
in which buyers and sellers operate.
• Is best defined as the organizational
and other characteristics of a market.
• Focuses on those characteristics
which affect the nature of competition
and pricing.
What is competition?
• Is the activity or condition of
competing.
• An event or contest in which
people compete.

In economics Competition is rivalry

among various sellers in the
market.
The market is a situation of
diffused, impersonal
competition among sellers
who compete to sell their
goods and among buyers who
use their purchasing power to
acquire the available goods in
the market.
There are varying degrees of competition in the
market depending on the following factors:

• Number and size of buyers and sellers

• Similarity or type of product bought and
sold
• Degree of mobility of resources
• Entry and exit of firms and input owners
• Degree of knowledge of economic agents
regarding prices, costs, demand, and
supply conditions.
Perfect Competition and
Imperfect Competition
 Perfect Competition
• Implies an ideal situation for the buyers
and sellers.
a. all firms sell an identical product
b. all firms are price takers – they cannot
control the market price of their product
c. all firms have a relatively small market
share
d. buyers have complete information
about the product.
 Perfect Competition
• An industry made up of a large
number of small firms, each selling
homogeneous ( identical ) products
to a large number of buyers.
 Characteristics of a perfectly competitive
market:
• There are so many buyers and sellers that
each has a negligible impact on market
price. Change in output of a single firm
will not perceptibly affect market price of
the good. No single buyer can influence
the price since he/she purchases only a
small amount. Buyer cannot extract
quantity discounts and credit terms.
• A homogeneous product is sold by
sellers, which means the products
are highly similar in such a way
consumers will have no preference in
buying from one seller over another.
The goods offered for sale are all
exactly the same or are perfectly
standardized.
• Perfect mobility of resources
refers to the easy transfer of
resources in terms of use or in
terms of geographical mobility.
• There is perfect knowledge of
economic agents of market
conditions such as present and
future prices, costs, and
economic opportunities.
• Market price and quantity of
output are determined
exclusively by forces of demand
and supply.
Is perfect competition realistic?
• Yes, because the model of perfect competition
is powerful and many markets.
 Imperfect Competition
• Is a type of market structure showing some
but not all features of competitive markets.
• A market where information is not quickly
disclosed to all participants in it and where the
matching of buyers and sellers isn’t
immediate.
• It is a market that does not adhere rigidly to
perfect information flow and provide instantly
available buyers and sellers.
Types of Imperfectly competitive
market
1.Monopoly
2.Monopolistic competition
3.Oligopoly
1. Monopoly
 Monopoly
• Exists when a single firm that sells
in the market has no close
substitutes. The existence of a
monopoly depends on how easy it
is for consumers to substitute the
products for those of other sellers.
Monopoly can exist for the following reasons:
• A single seller has control of entire supply of
raw materials.
• Ownership of patent or copyright is invested
in a single seller.
• The producer will enjoy economies of scale,
which are savings from a large range of
outputs.
• Grant of a government franchise to s single
firm.
• The monopolist faces a
downward-sloping demand
curve, the lower the price, the
higher the quantity that will be
bought by the consumer.
2. Monopolistic Competition
 Monopolistic Competition
• One imperfectly competitive market wherein
products are differentiated and entry and exit
are easy.
This market combines some characteristics of
perfect competition and monopoly. Its key
characteristics are:

• A blend of competition and monopoly.

• Firms sell differentiated products, which are
highly substitutable but are not perfect
substitutes.
• Many sellers offer heterogeneous or
differentiated products, similar but not
identical and satisfy the same basic need.
• Changes in product characteristics to increase
appeal using brand, flavor, consistency, and
packaging as means to attract customers.

• There is free entry and exit in the market that

enables the existence of many seller.

• It is similar to a monopoly in the firm can

determine characteristics of product and has
some control over price and quantity.
Monopolistically competitive firms are
most common in industries where
differentiation is possible, such as:
• The restaurant business
• Hotels and pubs.
• General specialist retailing
• Consumer services, such as
hairdressing
3. Oligopoly
 Oligopoly
• Is a market dominated by a small number
of strategically interacting firms. Few
sellers account for most of or total
production since barriers to free entry
make it difficult for new firms to enter.

• A state of limited competition, in which a

market is shared by a small number of
producers or sellers.
Characteristics:

• Action of each firm affects other

firms
• Interdependence among firms
examples
 Perfect
Market model/ Competition
Variables Monopoly Monopolistic
competition Oligopoly

Number of Large number of Single seller Relatively large

buyers/ sellers buyer and sellers number of sellers Few sellers

No one can
influence the Limited control Price
Pricing Price maker agreement
price (everyone over the price
is a price taker) among sellers

Homogeneous or Unique or no Differentiated Identical or

Kind of Product
identical close substitute products differentiated

Relatively
Very easy to Very Difficult to Relatively easy to
difficult to
Entry / Exit enter and exit enter into the enter into the enter into the
into the market. market. market
market
Significance of the market structure
• The type of market structure in which the
business operates will determine the amount
of market power or control the business
owner will enjoy. Greater market power
means a greater ability to control prices,
differentiate the products one offers for sale,
thus, leading to opportunities for more profits.