MARKET STURUCTURE AND PRICE – OUTPUT

DETERMINATION
The various market structures are represented by four basic market models. These are
theoretical frameworks for existing firms and industries in the real world. Such market models
describe the characteristics of the various market structures. However, some enterprises do not
exactly fit the characteristics of any of the market models. In other words, the market models are
not the complete replica of realities. But such market models are important because they help us
understand the real world where the market system is the principal of the economy.
Firm and industries play a vital role in our economy. They always seek ways of reducing
costs of production and of improving the quality of their goods and services, especially in a
competitive market.
Economic efficiency is the relationship between input (factors of production) and output (goods
and services produced by the factors of production)
The first and most important goal of the economic system should not be economic
efficiency but social equity. This refers to the fair allocation of the productive resources like
land, capital and management among the members of society. The market system allocates goods
and services though the mechanism of demand and supply.
Basic Market Models
1. Perfect/pure type
a. perfect or pure competition
b. pure monopoly
2. Imperfect/non-pure type
a. Monopolistic competition
b. Oligopoly

Market Models Defined

Pure Competition -is a market situation where there is large number of independent
sellers offering identical products.

Pure monopoly – refers to the market situation where there is only our seller or
producer supplying unique goods and services. A one – buyer market situation is known as
monopsony.

Monopolistic competition – pertains to a market situation where there is a relatively

large number of small producers or suppliers selling similar but not identical products.

Oligopoly – is associated with a market situation where there are few firms offering
standardized goods and services Such definition is not precise because oligopoly includes a
wider range of market structures than the others three market models. On the other hand, a few
buyer market situations is called oligopsony.

Characteristics of Market Models

Pure Competition
1. There is a large number of independent sellers.
2. Products are identical or homogeneous. Examples are farm products like rice, corn, fruits
vegetables, etc.
3. No single seller and no single buyer can influence the change in market price of a
product.
 4. It is easy for new firms or sellers to enter the market and for existing firms or sellers to
leave the market.
5. There is none – price competition like advertising, sales promotion, or packaging.

Pure Monopoly
1. There is only one producer or seller.
2. Products are unique in the sense that are no good or close substitutes available.
3. The monopolist makes the prices. Since he is the only supplier, he can reduce his output
in order to increase his price.
4. It is extremely difficult for new firms to enter the market. There are also natural
monopolies which refer to existing goods or services in which competition is not
practical or profitable.
5. There may be or no extensive advertising or sales promotion depending on the goods or
services of the monopolist.

Monopolistic Competition
1. There is a large number of sellers acting independently.
2. Products are differentiated. This means physical differences as well as variations in
location of the store, services of the sales staff, packaging of the product, credit condition,
advertisement, and other sales promotion strategies.
3. There is a limited control of price. It is possible for some sellers to slightly reduce or
increase their prices because of the differences of their products.
4. Entry of new firms in the market is relatively easy. However, compared with pure
competition, it is more difficult for firms under the monopolistic competition to put up
their business.
5. There is an aggressive non – price competition in product quality, credit terms, services,
location, and physical appearance of the product.

Oligopoly
1) There are every few firms which dominate the market. Each firm produces a big portion
of the total industry output.
2) Products are identical or different. Raw materials like steel, zinc, lead, cement and other
industrial raw materials are identical products.
3) There is a price agreement among the producers to promote their own economic interests.
The biggest among the procedures is the leader.
4) The entry of new competitors in the market is difficult. It requires enormous capital and
large – scale production.
5) There is strong advertising among those who produce differentiated products like cars,
cigarettes and appliances.

Determinants of Markets Structure

1. Government laws and policies. In some industries, the government controls the degree of
competition in the interest of the economy and the consumers.
2. Technology. For quite some time, certain firms have enjoyed their business positions as
monopolists.
3. Business policies and practices. The presence of giant firms discourages the entry of new
firms with little resources.
4. Economic freedom. The existence pf economic freedoms like the right to own private
properties, the right to engage in any lawful business, the right accumulate income, and
other similar economic freedoms associated with a free – enterprise economy have
somehow changed market structures.

TERMS TO REMEMBER:

Market Structure Market Models Industrialized Product

Independent Sellers Economic Freedom Competition
Homogeneous product Identical Product Extensive Advertising
Unique products Firms Differentiated Product
Free Enterprise Economy Competitors