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Market Structure

Chapter VI

Types of Market Structure

(1) Pure competition


(2) Monopoly
(3) Monopolistic Competition
(4) Oligopolistic Competition

At least eight factors define all four


market structures, but in differing ways.
A brief set of introductory notes
regarind these factors will give a strong
foundation to understand the nature of
each model.

Product
Pure competition good are
undifferentiated.
Monopolistic competition products are
slightly differentiated.
Oligopolistic products are substantially
diferentiated
Monopolies are highly differentiated.

Number of sellers
Business firms compete with one
another in one of four market
structures. While the four apply to
different industries, they share certain
similar characteristics.

The number of sellers in one type of market


ranges from plenty to one.

Market

Pure

Monopoli
stic

Oligopolis
Monopoly
tic

Seller

Plenty

Many

Few

One

Buyers
It is assumed that buyers are
numerous enough to create a
substantial demand for a product
under each market model.

Degree of control over


supply
The supply side of economic boils down to
one central issue: Control.
That is, control over product supply which
basically implies strong influence over its
price. Such control is either dispersed or
concentrated.
In pure and monopolistic competition, total
supply is dispersed thinly among many
sellers. On the other hand, total product
supply is concentrated in monopolies and
oligopolistic competition.

Degree of control over


price
The sellers in pure competition do not
control prices in the marketplace. They
take the prevailing pice therein.
Hence, economists call them price
takers.

Market Knowledge
In pure competition, both sellers and buyers
are highly familiar with or possess
information about, the product and market
prices. Buyers and sellers know what the
other is doing. Buyers also have a good idea
whether a product is prices fairly or
excessively. Economis call such familiarity
as Perfect knowledge. In contrast is
Imperfect knowledge, which pervades in the
three other models.

Market Knowledge
Perfect knowledge - highly familiar with
the possess information about, the
product and market prices.
Imperfect knowledge - less or not
familiar with the possess information
about, the product and market prices.

Marketing Approaches
The approach to maximizing sales and
profits is a choice between in price and
non-price rivalry in all four models.

Government Control
Assume that all four structures operate
under a free enterprise economy.

Pure Competition
The pure competition is a market model that
classical or traditional economists - started
by Adam Smith - developed under free
enterprise regime.
The model is premise on the free interplay of
the demand and supply market forces with
little or no government interference. Pure
competition is the economic bedrock of
democratic states.

Pure competition is often referred to as


perfect competition, because it is
flawless. This kind of competition is
pure or perfect in the sense that it is
considered the ideal market setting
therein buyers and sellers could
interact and do business. Predictably,
all its characteristics are premised on
that ideal.

But in this truly imperfect world,


economist agree that it is next to
impossible to find a 100% pure
competition industry.
The most they can do is pinpoint
industries that are close to a perfect
competition environment.

Characteristics of Pure
Competition
Homogenous product. The product
are homogenous, meaning they are
the same or highly similar composition.
One example is rice..
Rice is a given variety is homogenous
and so are most other agricultural
products.

Other authors describe products under pure


competition as identical or undifferentiated.
However, this identical thing is only in the
perception of consumers even if actual
differences may actually exist. The term
undifferentiated is another way of saying the
product involved are not different from each
other.
Perhaps, it is because of this identity crisis
that the products under pure competition are
substitutable, or have many substitutes,

Many Sellers
Total product supply is spread out to
numerous firms/sellers. Each is one
small - like a rice vendor - and,
therefore, sells only a tiny portion of
the total supply. In effect, no single
seller can control the product supply,
much less influence its price.

Ease of entry and exit


The smallness of existing firms easily
opens the industry to new small
sellers. Existing but weak firms can just
as easily disengage and get out of the
business because the cost of shutting
down small companies is usually lower
than keeping them running at a loss.

Entry and exit of competitors go


unnoticed because of the great
number of those in the business. (e.g.,
rice vendors). Additionally, the number
of entering and exiting firms tends to
cancel each other out and keep the
number of pure competition in relative
balance.

Many Buyers
The number of buyers of pure
competition products is large enough
to keep the numerous sellers in
business. Rice is an example of a
product with millions of consumers.

Pricing
The market forces of supply and demand
determine the pricing of products. Under
pure competition, the price of the product
essentially seeks its own level as the sellers
and buyers interact with perfect knowledge
in the marketplace.
The middle ground between them is struck
at the price-quantity combination where
consumer demand and supply meet.
The said common/middle ground, is known
as the equilibrium price.

If sellers decides to raise the price above the


equilibrium price, he will lose sales, as
customers will simply transfer to the next
nearest store. Such loss of sales puts
pressure on the seller to slide down the price
back to its equilibrium level. Otherwise he
will go out of business sooner than later.
Neither has the seller any incentive to bring
down the price since his available supply will
all be sold at the higher equilibrium price
anyway.

But should a seller persist in lowering his


prices, demand will exceed supply, thus
creating a shortage. A shortage puts a
pressure on the consumers to build up the
product price back to equilibrium level to
avert a shortage.
Advertising ones product is also unnecessary
and will only add in the sellers expenses.
This explains why pure competitiors rely more
on treating customers nicely and giving them
the best in order to earn their loyalty.

The key to pure competition is


maintaining cost and service efficiency.

Monopoly
it is a economic situation where only only
one producer supplies a community or
service to a particular community. The
sole store in a nieghborhood may be
classified as a local monopoly in much the
same way as the lone electric company
servicing one or more cities and
municipalities is a local monopoly.
There are also national monopolies that
are sole providers of product or service
nationwide.

Elements of Monopolies
The firm has full control of major resources
which no one else has. The said resources is
converted into a commodity or service.
The firm has the financial and technical
expertise to produce the commodity or service
at reasonable price. This will assure
continuance of customer patronage and its
own profits.
The firm has a long-term government patent
or franchise(i.e., Special License) that gives
full exclusivity and immunity from competition.

Characteristics of a Monopoly
Product. The commodity or service a
monopoly sells has no close
substitutes when it comes to function
and/or price. Let us take the case of
electric firms like MERALCO, PECO,
and the Iloilo Electric Cooperation
(ILECO). Electric Service, their main
business, is one of its kind.

Several product substitutes are available.


Companies can install their own generators
while households could light up using gas
lamps, battery-run lanterns, and even
candle. (e.g., lighting) is severely limited.
Also, they must cost more in the long-run.
The same holds true for government
monopoly products like water and postal
service. Water processors selling purified
water now proliferate in the market but sell at
comparatively much higher price.

One seller
Only one company services the needs
of the industry. The company is a large
entity that is aqequately equipped with
financial and technological resources.
One local Monopoly is Panay Electric
Co. (PECO). It possesses the three
elements of a monopoly.

Take note that a monopoly can arise, as well, from


the merger or combination of two or more rivals.
Consider two Cable TV firms locked in competition
in a given city. Why should two not merge when
this will (1) dramatically reduced their individual
investment in cable facilities that run into millions
of pesos, (2) cut by half the they individually pay
to the foreing satellite networks, (3) lesses their
combined need for motorized crews of installers
and servicemen, (4) save millions by removing
excess personnel, and (5) make it extremely
expensive for a third competitor to come in.

Barriers to entry
One barrier to the entry of a new rival involve
legalities. PECO owns the exclusive government
franchise to provide electric service in Iloilo City up
to a given time. Until that franchise ends and is not
renewed, no one else can legimately compete with
PECO in the city.
Another barrier involve economics. The government
- the franchise grantor - frowns on the unnecessary
duplication of immense capital for use on another
electric company. To a lesser extent, but equally
vital, is aesthetics: how would the skyline look like
with all duplicate electric poles and endless miles of
electric wires crisscrossing one another.

Many Buyers
Monopolies are permitted to remain
and thrive only for goods and services
that are vital to the majority of the
population. Example: are public
utilities, such as water and electricity.
Note that these monopolies have
countless consumers.

In theory, monopolies should strive to satisfy


customers in order to earn their loyalty and
admiration. However, some monopolies do
exactly the opposite. Banking on the
indispensability of their products or services because substitute are worse or costlier they tend to loosen up on quality and
become indifferent, if not calloused, to the
needs to customers. Fortunately, such
attitude has encouraged the influx of an
increasing number of messengerial firms,
water distributor, pager and cellphone outfits.

Pricing
Theoritically, a monopoly can price its
product as high as it feels consumers
can afford or tolerate, the reason being
the absense of close and economical
product substitutes. In other words, the
monopoly believes consumers have no
choice but bear the burden of high
prices, unreasonable as they may be.

This is where State policy and the collective voice of


consumers come in, Government could, and does,
require price justification from the monopoly. Thus,
the concerned regulatory agency usually convense
public hearings to get the side of both the monopoly
and the consumers.
Sometimes the congressional committee overseeing
the industry calls the two parties to public hearings
to defend their respectives sides.
Footnote: Congressional hearing are conducted in
aid of legislation. The findings therein are used to
improve existing laws and create additional laws.

Tight government control.


Government tighly controls monopolies
since they are public utilities serving the
general public. One is pricing, as mentioned
above. Also, the Commission on Audit
examines the books of electric firms before
they can raise their rates. Third, government
closely monitors the quality of service the
monopolies provide.

Monopolistic Competition
A monopolistic competitors shares a
monopolists strategy in that he tries to
dominate or monopolize the business
sector he is in. So that explain the
mono portion of the name
monopolistic competition.

Monopolistic competition is similar to


oligopolistic competition since both operate
under a larger market model called imperfect
competition. The imperfect side of the name
perhaps comes from the imperfect knowledge
that pervades the industry in which operates.
Knowledge is imperfect in the sense that
buyers do not have full information or full
understanding of the monopolistic industry. In
contrast, perfect knowledge exists in pure
competition.

Characteristics of Monopolisitic
Competition
Product. Examples of products
considered as belonging to
monopolistic competition include
laundry and bathroom soaps, RTWs
like designers shirt and jeans,
restaurants, purified water, handicrafts,
and similar retail consumer products.

The competiting goods, although falling


under the same product classification are
slightly differentiated. (The product are no
as identical as in pure competition.) Take
the case of two rival designer shirts. Both
are shirts and both carry the names of
internationally famous people.

The materials (e.g., 100% cotton) used in


both shirts could also be the same. Yet the
two are still quite different. Why so? The
designers meant it that way. Both shirts have
their own distinctive designs, color
combinations, lines, and cut to project the
personality and the unique taste of their
creators because product under
monopolistic competition are similar, we
could say that one product has many
substitutes.

Many Sellers
There are many sellers but not as
many as in pure competition. However,
monopolistic firms are generally bigger
that those in pure competition.
Consider the number of rice sellers
with restaurant operators in a given
locality and see the difference.

Easy of entry and exit


Total industry supply is widely
dispersed as in pure competition so
that each sellers accounts only for a
small portion of total demand. And
since firms are not the capital
intensive, few barriers to new entrants
exist. In the same way, the door is
open to those who want out.

Many Buyer
Consumers of monopolistic
competition products are in large
numbers. You could describe them
generally as selective shoppers and
patrons. They have the luxury of
choosing from among retailers and
restaurants in shopping centers. They
also frequent their favorite stores.

Prices
Monopolistic competitor are price makers. They are
free to set their own prices if only to impress upon
consumers that their products are superior to all the
rest. You will find this pricing tactic rather prominent
in the jeans market, for example. Oftentimes, the
price gap between two brands is so wide consumers
are convinced their competitor is likewise free to
increase or decrease price as he sees fit. Unlike the
pure competitor, the monopolistic firm will not lose
all sales if it raises its price. In some cases, raising
price will even attract a greater number of
customers because of the equation between price
and quality that is brought about by brand names.

Marketing Approaches
The monopolistic firm has to highlight how
differentiated his product is when compared with
direct competitors and substitutes. The product
attributes (e.g., designs, color combination)
should not only be different but distinctively
superior. These differences should be advertised
in the appropriate mdia and at appropriate times,
depending on whether the product is seasonal or
not. Another way of making the product different is
by pricing it differently (within the bounds of
equality perception from the rest of the
competitors.

For the retail stores under monopolistic


competition, product differentiation
means fast, convenient and courteous
service. Longer operating hours bring
more customers. Still another is
locating store at street corners.

Oligopolistic competition
Operates in an imperfect competition
setting because no full knowledge
exists between buyer and sellers.
Oligopolistic competition is also similar
in some aspects to a monopoly
situation.

Characteristics of Oligopolies
Products. Oligopolostics goods and
services include those in the oil,
cement, steel, cars, machinery, and
shipping industries. Competing
products are highly similar and there
are close substitutes, except for oil.

Number of sellers
An oligopolistic industry has few producers.
Total industry supply, therefore, is
concentrated among these few producers
and sellers.
They could number from three to around 13.
In the Philippines, the oil refinery industry is
controlled by the Big Three: Petron, Caltex,
and Shell. In the U.S., the automotive
oligopoly is composed of another Big
Three, namely GM, Ford, and chrysler.

Barriers to entry
Oligopolists usually puts up stiff but
indirect barriers to discourage new
rivals who could cut their share of the
market. One tactic is for oligopolists to
constantly expand production capacity
to saturate the market and make it
more expensive for new entrants to
come in.

Number of buyers
Number of buyers in an oligopoly
approximate the number of buyers in
pure competition

Price
Each oligopolist has a substantial part
of the product supply and, therefore, is
a price makers whose pricing decision
affect competitors.

Marketing Approaches
Form of strategic marketing: (1) giving
the best sales terms to customers; (2)
extending the best service possible to
customers; and investing in heavy
advertising and sales promotions.
These approaches most evident in the
laundry soap and oil industries.

Thank You

Kingsoft Office
published by www.ksosoft.com

@Kingsoft_Office

Kingsoft Office

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