MARKET STRUCTURES

(Week 5)

Grading Period: Third Quarter

Content Standards : The learner demonstrates an understanding of economics as an applied
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science and its utility in addressing the economic problems of the country . *

Performance Standards : The learners shall be able to analyze and propose solution/s to the
*

economic problems using the principles of applied economics . *

Most Essential Learning Competencies : * Differentiate various market structures in terms

of :
*

a. number of sellers *

b. types of products *

c. entry/exit to market *

d. pricing power *

e. others
References:
Books:
Birchall, O. (2016). Introduction to Economics EC 1002. United Kingdom. University of London
International Programmes Publication Office
Dilts, D. (2014). Introduction to Microeconomics E201. Indiana- Purdue University
Dinio, R. & Villasis, G. (2017). Applied Economics. Manila. Rex Book Store
McEachern, W. (2016). Economics: A Contemporary Introduction. Ohio, USA. South-Western
Thomson Corporation
Websites:
https://www.helpteaching.com/
https://www.coursera.org/lecture/microeconomics/2-1-market-structures-with-pricing-power-
53STJ
https://www.investopedia.com/terms/m/market-power.asp
 Motivation Activity
“ Pertaining to the opportunity to earn profit and competition in the market, what do you think could
be the disadvantages and advantages of the different market types given? Briefly discuss
”

your answer.
1. Selling fruits and vegetables in the market
Advantages:

Disadvantages:

2. Selling branded clothes and shoes online

Advantages:

Disadvantages:

3. Being the only one to offer “Bayad Center” service in your community

Bridge the Gap:

In the previous lessons, you already understand the concept of demand
and supply as well as having equilibrium price and quantity as an
agreement between the sellers and the buyers. All these basic
principles are assumptions in market economy where free trading
exists.
In this part of the module, you will learn more about the concepts of demand and supply which
ADVANCING LECTURE OUTLINE

Why are there firms that can still continue their business operations amidst pandemic?
Why are there products that have the same function but differ in prices in the market? How come
that only few companies compete in a very competitive industry? What are the advantages of
“

perfect competition in free market? All these questions and more are answered on this part of the
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module where we investigate the types of market structures and the characteristics of each of
them.
In Lesson 3, we learned the fundamental concepts of demand and supply. These basic
principles of economics are still related in this lesson where we will be able to examine the market
structures and the varying degrees of competition in which firms can operate.
“ It is important to note that competition is described as rival system among several market
suppliers . So we say that a market is any venue where trading of goods and services happens,
” “

thus, it is composed of various suppliers who compete to offer their goods to the customers who
use their buying power to acquire different products in the market . ”

Market structure describes the economic environment of an industry in which buyers and
sellers operate. Therefore, it presents the essential features and classification of market according
to market power.

FACTORS DETERMINING THE DEGREE OF COMPETITION AND MARKET POWER:

➢ Number and size of buyers and sellers
➢ Type of products
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➢ Entry and exit of firms in the market

➢ Pricing power
“ ”

➢ Degree of knowledge of economic agents regarding prices, costs, demand and

supply condition
“ Before we discuss the different types of market structure, let us first define each of the factors
that determine the competition level in the marketplace . ”

• Number and size of buyers and sellers

It determines the market concentration. Having more suppliers and sellers in the
market signifies less concentrated market; whereas fewer producers indicates a more
concentrated market. This market concentration also determines the market power of the
firms.

“ MARKET CONCENTRATION ”

Less Concentration More Concentration

More suppliers Less suppliers
Less market power More market power

• Type of Product *

It refers to the ability of the company to develop a market niche through different
methods of differentiating the goods and services (making the product unique).
Products could be:
o Homogenous – undifferentiated or same products
o Niche – differentiated or unique products

TYPE OF PRODUCT

Undifferentiated Differentiated
Homogenous Unique
Horizontal demand Inelastic demand
Very responsive to price Not responding to price
change change
Huge costs Huge profits
Low market power High market power

• Entry or Exit of firms in the market *

This refers to the strength of barriers that may hinder the entry of firms or suppliers
in the market. These are inherent features of the industry and different methods that are
 created in the market to prevent the entry of possible players and competitors that would
like to take advantage of the possible huge profit in a certain industry.

Kinds of Barriers to Entry:

o Scale Barriers – refers to requirements for a large production plant for a feasible
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operation in the industry ”

o Legal Barriers – refers to proprietary rights and their corresponding legal protection
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extended to existing market players in the production and distribution of products ”

BARRIERS

Scale Barriers Legal Barriers

Capital and resources
Intellectual properties such
as patents, copyrights and
trademarks*; government
requirements such as
licenses and permits

• Pricing Power *

“ This also refers to the market power of the firm or the ability to set or control the
price of products in the market. The level of pricing power depends on whether the firm
can regulate the level of demand and supply of the products. If the producers can
manipulate the level of supply or demand, then they are said to be price-setters. If the
producers cannot control the level of supply or demand, then they are price-takers for they
only have little pricing power. ”

PRICING POWER

Price setter Price taker

 More market power Less market power

• Degree of knowledge of economic agents *

This refers to the availability or limitation of economic information to the players in

the market like price, costs of materials, demand level and supply conditions. In real life,
we can see that there is unevenness in the distribution of information among the actors in
the market (household and firms).

MARKET ACTORS/ PLAYERS

Less Information More Information

More market power Less market power

Classification of Market Structures:

▪ Perfect Competition
▪ “ Monopoly ”

▪ Monopolistic
▪ Oligopoly

“ PERFECT COMPETITION ”

“ It presents an ideal market condition for the customers and suppliers. ”

“ Given here are the descriptions of a perfect competition in market considering the factors
determining the degree of competition. ”

• “ There are a lot of customers and suppliers in specific market, but they only show a
very little or no impact on the prices of items. ”
 o “ If one company in perfect competition decides to adjust the level of its
production output, the change in the level of its supply will not have significant
effect to the price of the products in the industry where it belongs. ”

o The buyers have definitely no market power to influence the market price
because in perfect competition, buyers usually purchase only small amounts
of items.
o It is difficult for buyers to ask for discounts and credit terms to sellers.

• Highly similar products or homogenous products are sold by the sellers in perfect
competition.
o The goods offered in the market are highly standardized.
o “ Consumers are indifferent or they don’t have preference whether to buy from
one supplier or switch to another one (because all sellers sell exactly the same
or standardized products) . ”

• “ The sellers have ease of entry or exit from the markets as there are no barriers to
enter into or exit from the industry . ”

o There are no special costs to intimidate the potential competitors or new

entrants in the market.
o There are no special barriers to prevent the sellers from exiting the market if
the suppliers feel to do so.

• In a perfectly competitive environment, the market players are price takers.

o “ Since no single buyer or seller can significantly impact the market price due to
their large number in the market, the sellers have to embrace whatever the
market price is. ”

• “ With regards to information of economic agents, the buyers and suppliers are well-
informed of the pricing, costs, and other relevant information for them to come up with
their economic decisions. ”

EXAMPLE OF PERFECT COMPETITION

Perfect competition exists in wet market and dry goods section. There are a lot of
vendors selling vegetables, fruits, fish, meat, unbranded shirts, etc. which are exactly similar
goods or standardized products. These products carry out the same satisfaction to consumers
and they are not differentiated nor branded.
IMPERFECT COMPETITION *

This type of competition exists when there are concepts of perfectly competitive
environment that are not met.

In this module, the three market structures under imperfect competition that are
discussed are monopoly, monopolistic competition and oligopoly.

Monopoly

“ Monopoly is from the Greek term , meaning “one seller”. Pure monopoly is not a
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common market situation compared to other market structures. The two extreme market
structures are perfect or pure competition and pure monopoly. From this concept, we can
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infer that monopoly is an exact opposite of perfectly competitive market structure . ”

• “ Monopoly exists when a single or one seller has control of entire supply of raw
materials . ”

o Only one seller offers a particular item in the market.

o There is no close substitute or no alternative store or firm for the monopolist.

EXAMPLE OF MONOPOLY
In the Philippines, utility companies like Meralco and Maynilad are firms that operate
as monopolist for they are the only companies that deliver utility services like electricity and
water which both don’t have close substitute in the market.

• The type of product in monopoly is highly differentiated or NO CLOSE SUBSTITUTE.

o “ The presence of monopoly in the market relies on the ease of replacement of
these products. In monopoly’s case, it is highly difficult for buyers to find an
alternative for the type of product that they offer in the market. ”

• “ There is monopoly in the market because of high barriers to entry of the players who
are trying to take advantage of the enormous market. ”
 o These barriers discourage new competitors in the market
o The very high barriers are known to be legal barriers like government and law
restrictions, patents and copyrights secured by the monopolists.

• “ The monopolist is the only supplier in the market so it is capable of setting the price
for its products through determining the output level or supply level in the market. ”

o “ Determining market price and the level of supply enables the monopolist to
really maximize its profits. ”

• The consumers have very little knowledge about the cost of materials or pricing
methods of monopolists. Thus, the consumers cannot discern whether the price of
their items is just adequate or not.

• The producer also enjoys economy of scale which means savings from production of
large range of outputs.

• “ Consumers might have bad perception about monopoly for they fear that monopolist
can just easily jack up the market price because consumers have no other choice but
to buy from that single seller of product. ”

• Consumers sometimes suffer from poor quality of the service or good that is offered
in the market by the monopolist.

Big Idea:
The monopolist faces a demand curve that has downward slope; meaning if the
“

price is low, the consumers will purchase more of that good.

Monopolistic Competition

Another market structure under imperfect competition is monopolistic competition

which has the qualities of both the perfect competition and monopoly.

• Many firms exist in the market under monopolistic competition.

o This is the characteristic of perfect competition that is the same in monopolistic
competition.
 o Many firms offer similar items in the market but may have different brands.

EXAMPLE OF MONOPOLISTIC
Car companies like Toyota, Honda, Mercedes-Benz, or Volkswagen are examples
under monopolistic competition. Even a Toyota car offers variety of choices like Wigo, Vios,
Altis, Innova, and Fortuner. They are all differentiated not only by brand name but also by
the model, the style and the additional convenience they offer.

• Firms sell heterogenous or differentiated products.

o This means that the products they sell have similar basic functions and can
satisfy the basic need of the customers however, there are variations in these
products which make them unidentical.
o These changes in the product characteristics vary with their appeal in the
market through different brand positioning, flavor, consistency, packaging, and
others which help them to attract customers.

• “ Sellers can freely enter or exit in the market which brings about the presence of many
different suppliers in the market. ”

o Sometimes barriers like market intensive approach of some firms make it

relatively challenging to enter the same market.

• Since the sellers are conditioning the market that they have something different to
offer compared to their competitors, they have the ability to set higher prices for their
products.

REMEMBER!
The firms under monopolistic competition has demand curve that has downward
“

slope. This shows that they can sell more by decreasing the price and they can
increase price while still retaining loyal buyers.
”
 Big Idea:
Companies in monopolistic competition are similar to a monopolist because they
can determine the special characteristics of their products and they have some
control over price and output level.

Oligopoly

An oligopoly is a type of imperfect competition for its industry is composed of few firms
that interact with each other.

• “ Few sellers account for most of or total production since barriers to entry levels up the
difficulty for new players to enter the market. ”

• “ These firms interact with each other and interdependence among them exists. ”

• “ Oligopolists collude with each other to raise prices which sometimes affect the final
consumers due to possible existence of poor service or goods. ”

• “ Barriers to entry and exit in oligopoly may come in the form of economy of scale, image
or reputation of the suppliers and strategic and legal barriers such as the grant of
patents/ franchises, existence of loyal customers, big capital investments and
specialized input, and control of supply of raw materials by few producers. ”

• “ Strategic systems of firms under oligopoly or cooperative behavior in oligopoly usually

takes the form of price-fixing or output-setting agreements such as the one maintained
by the OPEC (Organization of Petroleum Exporting Countries). ”

EXAMPLE OF OLIGOPOLY
“ Oil industry is one example of oligopoly which may collude with each other
regarding the market price of oil in the international market. They can control the market
or raise prices by agreeing on each other on what prices to give to buyers. Thus, countries
that utilize a lot of oil can’t do anything but to buy from these producers at high prices also
because oil doesn’t have close substitute in the market. ”