Big Picture in Focus: ULOb. Explain, evaluate and analyze market structure.

Metalanguage

The following are terms to be remembered as we go through in studying this unit.

Please refer to these definitions as supplement in case you will encounter difficulty in
understanding the concepts of Market Structure.
1. Market structure refers to all features of a market that affects the behavior and
performance of firms in the market and the degree of product differentiation.
2. Efficiency also refers to the productivity of inputs.

Essential Knowledge

This unit will discuss basic concepts of market structure. This will highlight the
different types of market structure and their respective characteristics. Please note that
you are not limited to exclusively refer to these resources. Thus, you are expected to
utilize other books, research articles and other resources that are available in the
university’s library e.g. ebrary, search.proquest.com etc., and even online tutorial
websites.

1. Pure Competition
Is a market structure mainly characterized by a large number of sellers (small
enough) which cannot affect the price of its competitors. The said market structure can
be observed in agricultural sector (products it offers). Aside from having a large number
of buyers, pure competition is also characterized by the following:
A. Offers homogenous products
Homogenous means similar and identical. Buyers cannot distinguish the product
from one seller to another because in the mind of the buyers it is identical. Due to this
characteristic, sellers cannot control price and simply follow what is being dictated in the
market under the influence of demand and supply. Sellers are price takers in this market
structure.
B. Easy entry and exit
This characteristic implies that there is no barrier that prohibits new firms to venture
or existing firms to leave. Due to capital requirement which is small enough, new firms
can enter if there is an opportunity to make profit while existing firms can easily exit
(without minding its fixed cost) if it incurs losses successively. This characteristic
determines the short-run and long-run profit orientation of the firm.
C. Efficiency in price and output
Under this market structure firms offer products at a lower price. This is due to the
kind of product it offers which is homogenous and the number of competitors it has. This
leads to efficiency in pricing where buyers benefit a lot and large supply of the products
due to competition. In order for firms to stay in the business they must operate under the
peak efficiency (lower price and large volume of output/products).
2. Monopoly
Is a market structure that exists when there is a sole producer in a given industry.
From the word itself, “mono” implies that there is single producer of a particular good or
service. It also means that the firm serves as the industry of a particular market. Say in
the utility market, Meralco is the sole power distributor in Greater Manila Area.
Aside from being a single seller/producer, monopoly is also characterized by the
following:
A. Offers unique products
A monopolist offers products that have no close substitutes. This makes the
monopolist control the industry and could manipulate the pricing level of the product.
Though in reality the product being offered may have a substitute but not close enough
that consumers may prohibit buying the product (say generator or lamp on
power/electricity).
B. Price maker
Since monopolist offers a unique product it can also control its price. This makes
the sole seller a price maker. If it wants to increase its price then it should produce lesser
of the product and if its wants to decrease its price then it should produce more of it. But
do you think it can charge price excessively?
C. Impossible Entry
Monopolist can block new firms in entering the industry. This means that it can set
barriers that would prohibit new firms in operating a business and becomes a competitor
of the monopolist. The said barriers includes: (a) Sole ownership of a vital resource; (b)
Legal barriers like government franchises and licenses; and (c) Economies of scale.
D. Goodwill Advertisement
Since there is no competition exists in this market structure, monopolist is not
encouraged in promoting extensively its product. However, in order to provide public
information regarding the services it offers, monopolist provides goodwill advertisement.
This may include announcement regarding changes in price or warnings, safety tips, etc.

3. Monopolistic Competition
Authored by Edward H. Chamberlin, monopolistic competition is a market structure
where there are many small sellers acting independently. It is one of the intermediate
market structures (the other one is oligopoly) that lies between pure competition and
monopoly. Thus some characteristics in this market structure can be observed both on
the previous aforementioned market structures. Apart from having many small sellers, it
is also characterized by the following:
A. Differentiated products
Firms under this market structure offer products that are similar but not identical.
This is termed as differentiated products. Manufactured goods like hygienic products,
restaurant services, malls and banks are example of this. Products are the same but they
differ in terms on the quality.
B. Price differentiation
This characteristic implies that firms, due to product differentiation, have some sort
of control over the price it charges on its products (but not absolute than monopoly). The
price being charged highly depends on the kind and quality of the product towards it
competitors.
 C. Easy entry and exit
Similar to pure competition new firms and existing firms are free to enter and exit
respectively. There may be a barrier under these market structure but it is relatively small
enough that cannot prevent new firms to enter and existing firms to exit.
D. Advertising
Because of product differentiation firms under this market structure spends
significant amount on advertising and promotion to capture consumers and earns profit.
Advertising became the main tool for firms in order to create imaginary differences about
their products against their competitors. Once effective, this leads to an increase of sales.

4. Oligopoly
Another form of market structure where there are few firms competing on a
particular industry is oligopoly. Firms in this market structure are greatly interdependent
with one another. Hence it formulates its own strategy/ies in relation to what its rivals will
make. Oligopoly, as a market structure, is also characterized by the following:
A. Offers homogenous or differentiated products
Oligopolies are classified as pure or differentiated. If firms produce an identical
product it is called pure oligopoly (i.e. oil and cement industry). If it produces differentiated
product then it is called as differentiated oligopoly (i.e. car and beer industry).
B. Barriers to entry
Under this market structure, existing firms can prevent new firms in entering the
market that creates competition. Because of these barriers existing firms faces an intense
competition resulting into some price and non-price methods of competition. The said
barriers could be exclusive financial requirements, control over essential resource, patent
rights, and some legal barriers.
C. Presence of collusion
Collusion is a secret agreement between two or more firms in order to achieve
certain objectives. It is classified into two types: perfect collusion and imperfect collusion.
Perfect collusion, also termed as cartel, is a formal organization of all firms on a given
industry that adheres rigorously to a definite agreement in terms of pricing and output
determination. Imperfect collusion is a tacit informal agreement between all firms in
establishing price and output.
Collusion creates large profit among firms in the industry due to less competition.
It also decreases oligopolistic uncertainty since firms are now well coordinated with one
another and possibly it can block new firms in entering the market since firms under
collusion act as a monopolists.
 Self-Help: You can also refer to the sources below to help you further
understand the lesson