Market

Structure
“
Market structure is
best defined as the
organizational and
other characteristics
of a market.
4 Basic types of market
structures by traditional
economic analysis

￮ Perfect competition,
￮ Monopolistic
competition,
￮ Oligopoly; and
￮ Monopoly
Monopoly
A monopoly is a market structure
in which there is only one
producer/seller for a product.
In other words, the single
business is the industry. Entry
into such a market is restricted
due to high costs or other
impediments, which may be
economic, social, or political.
For instance, in
the Philippines,
we have MERALCO
monopolizing the
distrbution of
electricity in
Metro Manila.
Another reason for the
barriers against entry into a
monopolistic industry is that
oftentimes, one entity has the
exclusive rights to a natural
resource. For example, in
Saudi Arabia, the government
has sole control over the oil
industry.
A monopoly may also form when
a company has a copyright or
patent that prevents others
from entering the market.
Due to prohibitive costs of
maintenance, others would not
dare to compete.
There is a tendency for
monopolist to maximize profits
and being the only one in the
market, will not think too
much for consumers’ welfare.
In a monopolistic structure,
there are two parties
involved, the monopolistic
company whose desire is to
gain more profit and the
consumers who could not do
anything but to seek the help
of the government.
 Characteristics of Monopoly
(Binger et. Al, 1998)
￮ Maximizes profits;
￮ Decides the price of
the good or product to
be sold;
￮ Other sellers are
unable to enter the
market of the monopoly;
 Characteristics of Monopoly
(Binger et. Al, 1998)
￮ There is one seller of
the good that produces
all the output. The
whole market being
served by a single
company;
￮ A monopolist can change
the price and quality of
the product.
Oligopoly
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In an oligopoly, there are
only a few firms that make up
an industry. This select group
of firms has control over the
price and, like a monopoly, an
oligopoly has high barriers to
entry.
The products that the
oligopolistic firms produce
are often nearly identical
and, therefore, the companies,
which are competing for market
share, are interdependent as a
result of market forces.
Oligopoly situations usually
invite collusion.
An oligopoly in which
participants explicitly engage
in price fixing is a cartel:
OPEC is one example. Tacit
collusion, on the other hand,
is perhaps more common though
more difficult to detect.
 Characteristics of Oligopoly
￮ Maximizes profits;
￮ Price setter rather
than a price taker
￮ Barriers to entry are
high. The most
important barriers are
government licenses,
economies of scale,
Characteristics of Oligopoly
Patents, access to
expensive and complex
technology, and
strategic actions by
incumbent firms
designed to discourage
or destroy promising
firms.
 Characteristics of Oligopoly
￮ There are so few firms
that that actions of
one firm can influence
the actions of other
firms;
￮ Oligopolies can retain
long run abnormal
profits
 Characteristics of Oligopoly
￮ Product may be
homogeneous or
differentiated;
￮ Oligopolies have perfect
knowledge of their own
cost and demand
functions but their
inter-firm information
may be incomplete.
 Perfect
Competition
Perfect competition is
characterized by many buyers
and sellers, many products
that are similar in nature
and, as a result, many
substitutes. Perfect
competition means there are
few, if any, barriers to entry
for new companies,
and prices are determined by
supply and demand. Thus,
producers in a perfectly
competitive market are subject
to the prices determined by
the market and do not have any
leverage.
 Characteristics of Perfect
Competition
￮ There is perfect knowledge, with
no information failure or time
lags in the flow of information.
Knowledge is freely available to
all participants, which means that
risk-taking is minimal and the
role of the entrepreneur is
limited.
 Characteristics of Perfect
Competition
￮ Consumers look to maximize their
utility, and producers look to
maximize their profits.
￮ There are no barriers to entry
into or exit out of the market.
￮ Firms produce homogeneous,
identical, units of output that
are not branded.
 Characteristics of Perfect
Competition
￮ Each unit of input, such as units
of labour, are also homogeneous.
￮ No single firm can influence the
market price, or market
conditions. The single firm is
said to be a price taker, taking
its price from the whole industry.
 Characteristics of Perfect
Competition
￮ There are very many firms in the
market – too many to measure. This
is a result of having no barriers
to entry.
￮ There is no need for government
regulation, except to make markets
more competitive
 Characteristics of Perfect
Competition
￮ There are assumed to be no
externalities, that is no external
costs or benefits to third parties
not involved in the transaction.
￮ Firms can only make normal profits
in the long run, although they can
make abnormal (super-normal)
profits in the short run.
 Equilibrium in
“ perfect competition
is the point where
market demands will
be equal to market
supply.
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Monopolistic
Competition
Monopolistic competition is a
type of imperfect competition
such that one or two producers
sell products that are
differentiated from one
another as goods but not
perfect substitutes (such as
branding, quality, or
location).
 Characteristics of Monopolistic
Competition
￮ There are many producers and many
consumers in the market, and no
business has total control over
the market price.
￮ Consumers perceive that there are
non-price differences among the
competitors’ products.
 Characteristics of Monopolistic
Competition
￮ There are few barriers to entry
and exit.
￮ Producers have a degree of control
over price.