Eco1-Managerial Economics

Module 4
    TOPIC 4- Market Structures
Learning Outcome:
1. Familiarize with the concept of a market
2. Distinguish and differentiate the various market structures from each other in
terms of their characteristics
3. Summarize the characteristics of each market structure according to the types of
products sold, the number of buyer and sellers, barrier to entry or exit, and
relative price influence in their respective industries.

Lesson Opening:

The forces of supply and demand need a mechanism that will facilitate exchanges between them.
The mechanism, which is called the market. Market is the place where you can buy the goods
and services you want, where buyers and sellers transact. The prices of these goods and services
are determined by the “forces” in the market and this where a market structure comes in, or the
competitive environment wherein buyers and sellers arrive at a price in exchanging their goods
and services deemed mutually beneficial.

Discussion Proper:

When buyers wishing to exchange money for a good or service are in contact with sellers
wishing to exchange goods and services for money, a market exists. A market may be confined
to a specific geographical area, like a certain town where buyers and sellers meet. In a modern
industrial economy contains many varieties of market structures, which may be classified into
regular market structures and special market structures.
The regular market structures are perfect competition, monopoly, oligopoly and monopolistic
competition or differentiated competition. 

 Perfect competition – occurs when a large number of sellers in producers of a good are
present in  the market, making the goods almost always available. The tendency in this
market structure is that there are so many firms that none of them can individually affect
the price of the product. This is a more common market structure in many modern
economies today.
Usually, homogeneous or standardized products are found in this market structure. These
products are so called homogeneous in the sense that they have similar characteristics and
each one does not significantly differ from the other products. In many instances, these
products do not carry individual brands. Agricultural products are very good examples of
these.
 Monopoly-in which a single firm produces the entire available products in an industry is
a market structure that is dominated by that firm. Monopoly is a special case of imperfect
competition. It is a situation in which here is only one seller in a market.
The monopolist firm usually has a very great influence over pricing and output decisions.
Such cases are rare in most market economics today.
Some regional and local firms tend to behave as a monopoly in their respective
immediate markets, especially when these firms tend to be new and the first to offer a
good or service in a specific area.
These include local or regional cable operators, power companies and water utility firms
that tend not to have competition in their area due to prohibitive costs of operation.
Monopolies may also be classified either as a natural monopoly or a legislated monopoly.
A natural monopoly arises in the market due to being sole producer with technical
advantages, such as the economics of scale (lower cost a great production quantities) that
come with greater firm size. A legislated monopoly, on the other hand is created by the
government legislation to career patents, licensing, franchising provisions, or regulations
on the rich. Only one firm is allowed to produce and market a commodity in a specific
regional and market. A natural monopoly may also be governed by legislation but enjoys
more freedom than a legislated monopoly, since it is not totally own and is run mostly by
people in the government.

 Oligopoly- is that market structure characterized by very few sellers in the market
making the product (s) available for the consuming public.
Since there are very few of these sellers, their price influence is great. Regulation is more
often than not necessary in an oligopolistic industry, due to the natural tendency of
collusion among these firms. These government regulations are often geared towards
encouraging these few firms to complete rather than to collude. The oil and
telecommunication industries in the Philippines are examples of this market structure. 
Unlike in monopolistic competition, each firm in oligopoly is very aware of the others.
Pricing and output decisions are based, in part, on predictions of the other firms’
reactions. If rivals cooperate in an oligopoly, they can achieve a joint monopoly solution.
One cooperative method is to form a cartel to restrict individual and collective output. In
a country like the Philippines forming a cartel is punishable by law.

 Monopolistic competition- is a market structure in which there are enough sellers or

producers and that each acts independently of the others, but are few enough that each
tends to have a “monopoly” of its own specific target market segments. The theory of
monopolistic competition is applied to the analysis of differentiated products.
Differentiated products are those that end to be similar of nature   and purpose, but are
used differently and are generally preferred by specific groups of consumers. A very
good example for this type of market structure are non-food traditional products such as
shampoo, soaps, and other cleaners. Although these products (and brands) belong to the
same category, each product tends to have its non-patrons, thereby allowing companies to
have some “monopoly” over their own respective markets. There are two special types of
market structures since they are not commonly found in many industries nor economies.
  Monopsony-is very similar to a monopoly, except that instead of having a single seller,
there is a single buyer in the industry. Some governments tend to participate his in
specific and sensitive industries the purchase of armaments, nuclear technology and the
like tend to be the monopoly of many governments, assuring that these products will not
be readily available to the public for national security reasons and measures. Although
there are private groups that also buy these items secretly from government they tend to
be more of illegal than legal groups.

 Oligopsony-is very similar to an oligopoly, except that instead of having a few sellers in
the industry, there are only very few buyers of a particular product. Usually, there exists a
mutually beneficial relationship between oligopolists and oligopsonists. This means that
there are very few sellers of a product specifically being made for very few buyers of the
same product. Transportation companies such as airlines and shipping lines tend to fall
into industries with this market structure.

 Duopoly- This is a kind of market model wherein there are only two sellers in the market.
Characteristics pf Market Structures:
Type of Market Types of Products Number of Number  of Barriers Entry Relative Influence
Structures sold in the Sellers in the Buyers in the or Exit from over the Price of the
Industry Industry Industry the Industry Products
Pure homogeneous or many many none easy to little or no influence 
Competition standardized enter price takers
Pure Monopoly unique one many very high absolute influence
seller is price maker
Monopolistic slightly many many low strong influence but
Computation differentiated usually a price taker
Oligopoly slightly few many very high very strong
differentiated influence seller
usually price maker
with  the others
Monopsony usually unique few one very high absolute influence
uniform buyer is price maker
Oligopsony slightly few to many few very high very strong
differentiated influence buyer
usually a price
maker
Duopoly unique two sellers few none easy to less control but
enter possible price maker