MARKETS STRUCTURES AND COMPETITION

Market Structure

- The nature and degree of competition among firms operating in the same industry

- Those characteristics of the market that significantly affect the behavior and interaction of buyers
and sellers

Market – a place where buyers and sellers are exchanging goods and services with the following
considerations:

1. Types of goods and services being trade;

2. The number and size of buyers and sellers in the market; and
3. The degree to which information can flow freely.

Two types of market structures:

1. Pure or Perfect Market

Pure or Perfect Competition – a market structure characterized by the following:

1. A large number of buyers and sellers exist.

-No single buyer or seller can affect price.
2. Buyers and sellers deal in identical products (Ex. Agricultural product).
3. Each buyer and seller acts independently-competition keeps price low.
4. Buyers and sellers are reasonably well-informed about items for sale.
-If everyone is informed, no one would be way off on price.
5. Buyers and sellers are free to enter into, conduct or get out of business.

REALITY

Pure competition does not exist to any great degree – for this reason it is considered a
theoretical situation.

It is studied in order to evaluate other marker structures.

Any market situation or structure that lacks any of the above characteristics or conditions
above is considered imperfect competition.

Most/all firms fall into this category.

2. Imperfect Market

Imperfect market includes:

1. Monopoly – a market structure characterized by the following:

1. Only one producer or seller of goods and services and only one provider of services in
the market.
2. New firms find extreme difficulty in entering the market.
3. There is no close substitute so that a product or service is considered unique.
4. It controls the total supply of raw materials in the industry and has control over price.
5. It owns a patent or copyright.
 - In monopoly there is Price Discrimination – the business practice of selling the same good
or service at different prices to different customers.

Types of Monopolies:

1. Natural Monopolies
– A situation in which costs are minimized by having a single firm produce the product.

–the nature of the industry dictates that society would be better served by only one
supplier. Examples: Electric and water companies or Utility Companies.

–Utility companies granted permission from the government to act as monopoly in a

certain area, but they must also follow regulations.

2. Geographic Monopolies

– A monopoly exists because no other business in the immediate area offers any
competition. Example: Gas Station in middle of nowhere.
– This may last as others decide to start in the area to compete.

3. Technological Monopolies

– A firm or individual has discovered a new manufacturing technique or has invented or

created something entirely new. Examples: I-phone, Hybrid Car.
– If you get a patent on the product, no one else can legally produce it.

4. Government Monopoly

– A business the government owns and operates. Examples: mail services, local water
authorities.

2. Monopolistic Competition – a market structure characterized by the following:

1. A large number of buyers and sellers in a given market.

2. There is a limited control of price because of product differentiation.
3. Sellers offer differentiated or similar products but not identical products.
4. New firms can enter the market easily. However, there is a greater competition in the
sense that new firms have to offer better features on their products.
5. Competition in the market focuses not on price but also on product variation and
promotion

Product Differentiation – the practice of making product unique or different from similar
ones.

Types of product differentiation:

1. Real
2. Imaginary
3. Oligopoly – a market structure characterized by the following:

1. There is a small number of firms in the market selling differentiated or identical

products.
2. The firm has control over price because of the small number of firms providing the
entire supply of a certain product.
3. There is an extreme difficulty for new competitors to enter the market.

-due to few numbers of firms, one can cause a change in output, sales and price in the
industry as a whole.

-because there are so few firms, whenever one firm does something the other usually
follow.

Collusion – an agreement among firms in a market about prices to charge and quantities
to produce.

Cartel – a formal organization of the producers within a given industry.

– An example of collusion in its most complete form.
 Summary of Different Market Structures
Market Perfect Monopolistic
Oligopoly Monopoly
Characteristics Competition Competition
Product
Differentiation Only Slight when the
No Yes Yes
oligopolist supplies
(Brand Name) raw materials

Occasional with
Price Competition Intense: must Intense Occasional but producers
meet price of cooperative behavior of substitute goods and
other firms often present services; price of natural
monopolies subject to
regulation
Non-price
Competition No High High Often, to promote public
(Advertising) goodwill
Barriers to Entry No Low High High
Information Cost No Low High High
Opportunities to Many, though often
No Few Many
earn and keep regulated
economic profits
Number of sellers large number Numerous buyers Small number of firms Only one seller
of sellers and sellers
Degree of control Price taker Limited control has control over price Price maker
over price
Type of product Homogeneous Differentiated Differentiated or highly standardized
product products or similar identical products
but not identical