Market And Different Types Of Market Structures

Market:
A market is a place where two parties can gather to facilitate the exchange of goods and
services. The parties involved are usually buyers and sellers. The market may be physical like
a retail outlet, where people meet face-to-face, or virtual like an online market, where there is
no direct physical contact between buyers and sellers.

Types Of Market:

1. Perfect Competition Market Structure

In a perfectly competitive market, the forces of supply and demand
determine the amount of goods and services produced as well as market prices set by the
companies in the market.
Perfect competition assumes the environment or climate cooperates with the buildings within
it. The perfectly competitive market structure is a theoretically ideal market; there is free
entry and exit, so many companies move into the market and easily exit when it’s not
profitable. With so many competitors, the influence of one company or buyer is relatively
small and does not affect the market as a whole.
Buyers and sellers are referred to as price takers rather than price influencers. 
The products within the market are seen as homogenous, there is little difference between
them. Not only are the products identical, information regarding product quality and price is
perfectly and openly given to the public. The model assumes each producer is operating at the
lowest possible cost to achieve the greatest possible output.
The perfect competition model is difficult to find in operation. There are few agricultural and
craft markets that may fit the theory. This model is primarily a reference point from which
economists compare the other market structures.

2. Monopolistic Competition Market Structure

Unlike perfect competition, monopolistic competition does not assume lowest possible
cost production.
That slight difference in definition leaves room for huge differences in how the companies
operate in the market.
Companies in a monopolistic competition structure sell very similar products with small
differences they use as the basis of their marketing and advertising.
This is completely different from the perfectly competitive market structure which excludes
advertising. Consider bath soap — they are all pretty much the same as far as what makes it
soap and its use, but small differences like fragrance, shape, added oils or color are used in
advertising and in setting price.
In monopolistic competition producers are price maximizers.
When the profits are attractive, producers freely enter the market. The slight differences
between the products also creates imperfect information regarding quality and price.
Monopolistic competition markets are a hybrid of two extremes, the perfectly competitive
market and monopoly.
Examples of monopolistic competition markets are:
 service and repair markets like HVAC repair companies.
 beauty salons and spas.
 and tutoring companies.
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3. Monopoly Market Structure

Monopolies and perfectly competitive markets sit at either end of market structure
extremes. However, both minimize cost and maximize profit. Where there are many
competitors in a perfect competition, in monopolistic markets there’s just one supplier.
High barriers to entry into this market leave a “mono-” or lone company standing so there is
no price competition. The supplier is the price-maker, setting a price that maximizes profits.
There are naturally occurring monopolies and those created through legislation, such as state-
legislated liquor stores. However, several companies have been criticized as breaking
antitrust laws including:
a. Microsoft
b. De Beers
c. Major League Sports

4. Oligopoly Market Structure

Not all companies aim to sit as the sole building in a city. Oligopolies have companies
that collude, or work together, to limit competition and dominate a market or industry.  The
companies in these market structures can be large or small, however, the most powerful firms
often have patents, finance, physical resources and control over raw materials that create
barriers to entry for new firms.
Since this market structure discourages true competition, the producers are able to set prices,
but the market is price sensitive. If the prices are too high, buyers will migrate to the market’s
product substitutes.
 There are pure oligopolies with homogenous products, like the gasoline industry.
 Some firms function in differentiated oligopolies; selling products with small
differences, like fast food or air transportation.
Understanding the definition of market structure and the differences within these four types
allows you to be understand the context under which a company in question functions.
The dynamic relationships among and between sellers and buyers changes pricing, profits
and production levels. Trading and investing requires researching how firms react to those
relationships and changes and forecasting how their reactions will change their bottom lines,
and yours.
5. Monopsony:
Monopsony is a market condition in which there is only one buyer. Like a monopoly, a
monopsony also has imperfect market conditions. The difference between a monopoly and
monopsony is primarily in the difference between the controlling entities. A single buyer
dominates a monopsonized market while an individual seller controls a monopolized market.
In a monopsony, a large buyer controls the market. There are several scenarios where a
monopsony can occur. Like a monopoly, a monopsony also does not adhere to standard
pricing from balancing supply-side and demand-side factors. In a monopoly, where there are
few suppliers, the controlling entity can sell its product at a price of its choosing because
buyers are willing to pay its designated price. In a monopsony, the controlling body is a
buyer. This buyer may use its size advantage to obtain low prices because many sellers vie
for its business.
Monopsonies take many different forms and may occur in all types of markets.
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Characteristics Of Different Markets:

1. Characteristics Of Perfect Competition:
The four key characteristics of perfect competition are:
1. A large number of small firms,
2. Identical products sold by all firms
3. Perfect resource mobility or the freedom of entry into and exit out of the industry.
4. Perfect knowledge of prices and technology.
These four characteristics mean that a given perfectly competitive firm is unable to exert any
control whatsoever over the market. The large number of small firms, all producing identical
products, means that a large (very, very large) number of perfect substitutes exists for the
output produced by any given firm.
This makes the demand curve for a perfectly competitive firm's output perfectly elastic.
Freedom of entry into and exit out of the industry means that capital and other resources are
perfectly mobile and that it is not possible to erect barriers to entry. Perfect knowledge means
that all firms operate on the same footing, that buyers know about all possible perfect
substitutes for a given good and that firms actually do produce identical products.
1. Large Number of Small Firms
A perfectly competitive market or industry contains a large number of small firms, each of
which is relatively small compared to the overall size of the market. This ensures that no
single firm can exert market control over price or quantity. If one firm decides to double its
output or stop producing entirely, the market is unaffected. The price does not change and
there is no discernible change in the quantity exchanged.
How many firms are needed in a perfectly competitive industry, such that each is so small it
has absolute no market control? There is no actual number that answers this question. This is
due partly to the fact that perfect competition is an idealized market structure that does not
exist in the real world. It is also partly due to the notion that the number of firms is not as
important as the result... that no firm has market control.
2. Identical Goods
Each firm in a perfectly competitive market sells an identical product, which is also
commonly termed "homogeneous goods." The essential feature of this characteristic is not so
much that the goods themselves are exactly, perfectly the same, but that buyers are unable to
discern any difference. In particular, buyers cannot tell which firm produces a given product.
There are no brand names or distinguishing features that differentiate products by firm.
This characteristic means that every perfectly competitive firm produces a good that is a
perfect substitute for the output of every other firm in the market. As such, no firm can
charge a different price than that received by other firms. If they should try to charge a higher
price, then buyers would immediately switch to other goods that are perfect substitutes.
3. Perfect Resource Mobility
Perfectly competitive firms are free to enter and exit an industry. They are not restricted by
government rules and regulations, start-up cost, or other barriers to entry. While some firms
incur high start-up cost or need government permits to enter an industry, this is not the case
for perfectly competitive firms. Likewise, a perfectly competitive firm is not prevented from
leaving an industry as is the case for government-regulated public utilities.
Perfectly competitive firms can acquire whatever labor, capital, and other resources that they
need without delay and without restrictions. There is no racial, ethnic, or sexual
discrimination.
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4. Perfect Knowledge
In perfect competition, buyers are completely aware of sellers' prices, such that one firm
cannot sell its good at a higher price than other firms. Each seller also has complete
information about the prices charged by other sellers so they do not inadvertently charge less
than the going market price. Perfect knowledge also extends to technology. All perfectly
competitive firms have access to the same production techniques. No firm can produce its
output faster, better, or cheaper because of special knowledge of information.

2. Characteristics Of Monopolistic Competition:

The four key characteristics of monopolistic competition are:
1. large number of small firms.
2. similar but not identical products sold by the firms.
3. relative freedom of entry into and exit out of the industry.
4. extensive knowledge of prices and technology.
These four characteristics mean that a given monopolistically competitive firm has a little
bit of control over its small corner of the market. The large number of small firms, all
producing nearly identical products, mean that a large (very, very large) number of close
substitutes exists for the output produced by any given firm. This makes the demand curve
for that firm's output relatively elastic.
Freedom of entry into and exit out of the industry means that capital and other resources
are highly mobile and that any barriers to entry that might exist are minimal. Entry barriers
allow real world firms to acquire and maintain above normal economic profit. Extensive
knowledge means that all firms operate on the same footing, that buyers know a lot about
possible substitutes for a given good, and that firms are aware of essentially the same
production techniques.
Large Number of Small Firms
A monopolistically competitive industry contains a large number of small firms, each of
which is relatively small compared to the overall size of the market. This ensures that all
firms are relatively competitive with very little market control over price or quantity. In
particular, each firm has hundreds or even thousands of potential competitors.
This number-of-firms characteristic is a sliding scale. The extent to which an industry has a
large number of small firms, the more it is monopolistic competition. Industries with a
smaller number of larger firms then tend to be more oligopolistic. There is no clear-cut
dividing line that separates monopolistic competition from the more concentrated market
structure--oligopoly. A three-firm industry is most assuredly an oligopoly. A 3,000 firm
industry is most assuredly monopolistic competition. But, an industry with 30 firms could be
oligopoly or monopolistic competition.
Similar, But Not Identical Goods
Each firm in a monopolistically competitive market sells a similar product. Yet each
product is slightly different from the others. The term used to describe this is product
differentiation. Product differentiation is responsible for giving each monopolistically
competitive a little bit of a monopoly, and hence a negatively-sloped demand curve.
Differences among products generally fall into one of three categories:
(1) physical difference, (2) perceived difference, and (3) difference in support services.
 Physical Difference: This means that the product of one firm is physically different from
the product of other firms.
 Perceived Difference: Product differentiation can also result from differences perceived
by buyers, even though no actual physical differences exist. Brand names, in fact, are a
common method of creating the perception of differences among products when none
physically exist. However, perceived differences work just as well for monopolistic
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competition as actual differences. In the minds of the buyers, it matters not whether the
differences are real or perceived.

 Support Service Difference: Products that are physically identical and perceived to be
identical, can also be differentiated by support services. This is quite common in retail
trade. Every monopolistically competitive firm produces a good that is a close, but not a
perfect substitute for the good produced by every other firm in the market. As such,
different firms can charge slightly different prices.
Resource Mobility
Monopolistically competitive firms, like perfectly competitive firms, are free to enter and
exit an industry. The resources might not be as "perfectly" mobile as in perfect competition,
but they are relatively unrestricted by government rules and regulations, start-up cost, or
other substantial barriers to entry. While some firms incur high start-up cost or need
government permits to enter an industry, this is not the case for monopolistically competitive
firms. Likewise, a monopolistically competitive firm is not prevented from leaving an
industry as is the case for government-regulated public utilities.
Most important, monopolistically competitive firms can acquire whatever labor, capital,
and other resources that they need with relative ease. There is no racial, ethnic, or sexual
discrimination.
Extensive Knowledge
In monopolistic competition, buyers do not know everything, but they have relatively
complete information about alternative prices. They also have relatively complete
information about product differences, brand names, etc. Moreover, each seller also has
relatively complete information about the prices charged by other sellers so that they do not
inadvertently charge less than the going market price.

3. Characteristics Of Monopoly:

1. A Lack of Substitutes
One firm producing a good without close substitutes. The product is often unique. Ex:
When Apple started producing the iPad, it arguably had a monopoly over the tablet market.
2. Barriers to Entry
There are significant barriers to entry set up by the monopolist. If new firms enter the
industry, the monopolist will not have complete control of a firm on the supply. These
barriers imply that under a monopoly there is no difference between a firm and an industry.
3. Competition
There are no close competitors in the market for that product.
4. Price Maker
The monopolist decides the price of the product, since it has the market power. This makes
the monopolist a price maker.
5. Profits
While a monopolist can maintain supernormal profits in the long run, it doesn’t necessarily
make profits. A monopolist can be a loss making or revenue maximizing too. This is not
possible under perfect competition. If abnormal profits are available in the long run, other
firms will enter the competition with the result abnormal profits will be eliminated.

4. Characteristics Of Oligopoly:
Oligopoly as a market structure is distinctly different from other market forms.
Its main characteristics are discussed as follows:
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1. Interdependence:
The foremost characteristic of oligopoly is interdependence of the various firms in the
decision making.
This fact is recognized by all the firms in an oligopolistic industry. If a small number of
sizeable firms constitute an industry and one of these firms starts advertising campaign on a
big scale or designs a new model of the product which immediately captures the market, it
will surely provoke countermoves on the part of rival firms in the industry.
Thus, different firms are closely inter dependent on each other.
2. Advertising:
Under oligopoly a major policy change on the part of a firm is likely to have immediate
effects on other firms in the industry. Therefore, the rival firms remain all the time vigilant
about the moves of the firm which takes initiative and makes policy changes. Thus,
advertising is a powerful instrument in the hands of an oligopolist. A firm under oligopoly
can start an aggressive advertising campaign with the intention of capturing a large part of the
market. Other firms in the industry will obviously resist its defensive advertising.
Under perfect competition advertising is unnecessary while a monopolist may find some
advertising to be profitable when his product is new or when there exist a large number of
potential consumers who have never tried his product earlier.
3. Group Behaviour:
In oligopoly, the most relevant aspect is the behaviour of the group. There can be two firms
in the group, or three or five or even fifteen, but not a few hundred. Whatever the number, it
is quite small so that each firm knows that its actions will have some effect on other firms in
the group. In contrast, under perfect competition there are a large number of firms each
attempting to maximize its profits.
Similar is the situation under monopolistic competition. Under monopoly, there is just one
profit maximizing firm. Whether one considers monopoly or a competitive market, the
behaviour of a firm is generally predictable.
In oligopoly, however, this is not possible due to various reasons:
(i) The firms constituting the group may not have a common goal
(ii) The group may or may not have a formal or informal organization with accepted rules of
conduct
(iii) The group may be dominated by a leader but other firms in the group may not follow him
in a uniform manner.
4. Competition:
This leads to another feature of the oligopolistic market, the presence of competition. Since
under oligopoly, there are a few sellers, a move by one seller immediately affects the rivals.
So each seller is always on the alert and keeps a close watch over the moves of its rivals in
order to have a counter-move. This is true competition, “True competition consists of the life
of constant struggle, rival against rival, whom one can only find under oligopoly.”
5. Barriers to Entry of Firms:
As there is keen competition in an oligopolistic industry, there are no barriers to entry into
or exit from it. However, in the long-run, there are some types of barriers to entry which tend
to restrain new firms from entering the industry.
These may be:
(a) Economics of scale enjoyed by a few large firms;
(b) Control over essential and specialized 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.
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When entry is restricted or blocked by such natural and artificial barriers the oligopolistic
industry can earn long-run supernormal profits.

6. Lack of Uniformity:
Another feature of oligopoly market is the lack of uniformity in the size of firms. Firms
differ considerably in size. Some may be small, others very large. Such a situation is
asymmetrical. This is very common in the American economy. A symmetrical situation with
firms of a uniform size is rare.
7. Existence of Price Rigidity:
In oligopoly situation, each firm has to stick to its price. If any firm tries to reduce its
price, the rival firms will retaliate by a higher reduction in their prices. This will lead to a
situation of price war which benefits none. On the other hand, if any firm increases its price
with a view to increase its profits; the other rival firms will not follow the same. Hence, no
firm would like to reduce the price or to increase the price. The price rigidity will take place.
8. No Unique Pattern of Pricing Behaviour:
The rivalry arising from interdependence among the oligopolists leads to two conflicting
motives. Each wants to remain independent and to get the maximum possible profit. Towards
this end, they act and react on the price-output movements of one another which are a
continuous element of uncertainty.
On the other hand, again motivated by profit maximization each seller wishes to cooperate
with his rivals to reduce or eliminate the element of uncertainty. All rivals enter into tacit or
formal agreement with regard to price-output changes.
It leads to a sort of monopoly within oligopoly. They may even recognize one seller as a
leader at whose initiative all the other sellers raise or lower the price. In this case, the
individual seller’s demand curve is a part of the industry demand curve, having the elasticity
of the latter. Given these conflicting attitudes, it is not possible to predict any unique pattern
of pricing behaviour in oligopoly markets.
9. Indeterminateness of Demand Curve:
In market structures other than oligopolistic, demand curve faced by a firm is determinate.
The interdependence of the oligopolists, however, makes it impossible to draw a demand
curve for such sellers except for the situations where the form of interdependence is well
defined. In real business operations, the demand curve remains indeterminate. Under
oligopoly a firm can expect at least three different reactions of the other sellers when it
lowers its prices.
This happened due to the reason:
(i) It is possible that other maintain the prices they had before. In this case, an oligopolist can
hope that its demand would increase substantially as the prices are lowered,
(ii) When an oligopolist reduces his price, the other sellers also lower their prices by an
equivalent amount. In this situation although demand of the oligopolist making the first move
will increase as he lowers his price, the increase itself would be much smaller than in the first
case.
(iii) When a firm reduces its price, the other sellers reduce their prices far more. Under the
circumstances the demand for the product of the oligopolistic firm which makes the first
move may decrease. Thus, uncertainty under oligopoly is inevitable, and as a result, the
demand curve faced by each firm belonging to the group is necessarily indeterminate.

Characteristics Of Monopsony:
The three key characteristics of monopsony are:
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(1) a single firm buying all output in a market, (2) no alternative buyers, and (3) restrictions
on entry into the industry.
 Single Buyer: First and foremost, a monopsony is a monopsony because it is the only
buyer in the market. The word monopsony actually translates as "one buyer." As the only
buyer, a monopsony controls the demand-side of the market completely. If anyone wants
to sell the good, they must sell to the monopoly.

 No Alternatives: A monopsony achieves single-buyer status because sellers have no

alternative buyers for their goods. This is the key characteristics that usually prevents
monopsony from existing in the real world in its pure, ideal form. Sellers almost always
have alternatives.

 Barriers to Entry: A monopsony often acquires and generally maintains single buyer
status due to restrictions on the entry of other buyers into the market. The key barriers to
entry are much the same as those that exist for monopoly: (1) government license or
franchise, (2) resource ownership, (3) patents and copyrights, (4) high start-up cost, and
(5) decreasing average total cost.

Index To Measure Competitiveness Of a Market:

1. C4 Ratio:
A C4 ratio is the ratio of the combined market shares of top four firms to the whole market
size. C4 ratio is used to assess the extent to which a given market is oligopolistic.

(S 1+S 2+ S 3+ S 4)
Formula:
ST

Where S1,S2,S3 and S4 is sales of top four firms and ST is total sales of all firms.
Range:
The concentration ratio ranges from 0% to 100%, and an industry's concentration ratio
indicates the degree of competition in the industry. A concentration ratio that ranges from 0%
to 50% may indicate that the industry is perfectly competitive and is considered low
concentration.
A rule of thumb is that an oligopoly exists when the top four firms in the market account for
more than 60% of total market sales. If the concentration ratio of one company is equal to
100%, this indicates that the industry is a monopoly.

2. Herfindahl-Herschman Index
The Herfindahl-Herschman Index (HHI) is an alternative indicator of firm size,
calculated by squaring the percentage share (stated as a whole number) of each firm in an
industry, then summing these squared market shares to derive a HHI. The HHI has a fair
amount of correlation to the concentration ratio and may be a better measure of market
concentration.

S1 2 S2 2 S3 2 SN 2
Formula: [ ( )( )( ) ( )
ST
+
ST
+
ST
+…
ST
]10,000

Where S1,S2,S3…. Are the individual sales of firms and ST is total sales of all firms.
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Range:
The closer a market is to a monopoly, the higher the market's concentration (and the lower
its competition). If, for example, there were only one firm in an industry, that firm would
have 100% market share, and the Herfindahl-Hirschman Index (HHI) would equal 10,000,
indicating a monopoly. If there were thousands of firms competing, each would have nearly
0% market share, and the HHI would be close to zero, indicating nearly perfect competition.
The U.S. Department of Justice considers a market with an HHI of less than 1,500 to be a
competitive marketplace, an HHI of 1,500 to 2,500 to be a moderately concentrated
marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace.
Determination Of Market Type by using C4 Ratio And HHI
Index Of 2013 and 2014 of Insurance Companies in Pakistan:

C4 Ratio and HH Index for Year 2013

C4 Ratio:

DATA FOR THE YEAR 2014

SR. SYMBOL
NO. NAME OF COMPANY

1 EFUL EFU Life Assurance Limited

2 JLICL Jubilee Life Insurance Company Limited
3 IGIL IGI Life Insurance Limited
4 EWLA East West Life Assurance Company Limited
Total Sales

 C4 Ratio for 2013 of Insurance Companies is 1 which means 100%.

 100% C4 Ratio means Market for insurance companies in 2013 is Monopoly.

HHI Index:

DATA FOR THE YEAR 2014

SR. SYMBOL YEAR
NO. NAME OF COMPANY END

1 EFUL EFU Life Assurance Limited 31-Dec-14

2 JLICL Jubilee Life Insurance Company Limited 31-Dec-14
3 IGIL IGI Life Insurance Limited 31-Dec-14
4 EWLA East West Life Assurance Company Limited 31-Dec-14
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 HH Index is over 2,500 i.e. 3317.

 This means that market is highly concentrated industry.

C4 Ratio and HH Index for Year 2014

C4 Ratio:

DATA FOR THE YEAR 2014

SR. SYMBOL
NO. NAME OF COMPANY

1 EFUL EFU Life Assurance Limited

2 JLICL Jubilee Life Insurance Company Limited
3 IGIL IGI Life Insurance Limited
4 EWLA East West Life Assurance Company Limited
Total Sales
Sum Of Top 4 Firms

 C4 Ratio for 2013 of Insurance Companies is 1 which means 100%.

 100% C4 Ratio means Market for insurance companies in 2014 is Monopoly.

HHI Index:

DATA FOR THE YEAR 2014

SR. SYMBOL YEAR SALES /
NO. NAME OF COMPANY END TOTAL INCOME
(Rs. in million)
1 EFUL EFU Life Assurance Limited 31-Dec-14 493 0.35920
2 JLICL Jubilee Life Insurance Company Limited 31-Dec-14 216 0.06872
3 IGIL IGI Life Insurance Limited 31-Dec-14 95 0.01339
4 EWLA East West Life Assurance Company Limited 31-Dec-14 19 0.00052
Total 823 0.44184
HHI Index 4418.371

 HH Index is over 2,500 i.e. 4418.

 This means that market is highly concentrated industry.