MARKET STRUCTURE

Market

An agreement/ arrangement between buyer and sell to do transaction. Market does not necessarily
be a physical place.

Characteristics of markets

 presence of buyers and sellers

 The presence goods and services to be transacted
 Presence of competition
 The price of goods to be sold and bought
 The presence of information about price, quality of goods, brand name
 etc

Classification of market

Market can be classified differently depending on the

 Time (short run and long run),

 Nature (local and international market), and
 Degree of competition (perfect competition and imperfect competition market)

Market structure

Market structure is best defined as the organisatonal and other characteristics of a market. The
focus is on those characteristics which affect the nature of competition and pricing - but it is
important not to place too much emphasis simply on the market share of the existing firms in an
industry. Traditionally, the most important features of market structure are;

i. The number of firms including the scale and extent of foreign competition
ii. The market share of the largest firms measured by the concentration ratio
iii. The nature of costs including the potential for firms to exploit economies of scale
iv. The presence of sunk cost (is a cost that has already been incurred and cannot be
recovered) which affects market contestability (market served by small number of firms
that are nevertheless characterized by competitive characteristics) in the long term
 v. The degree to which the industry is vertically integrated.
Vertical integration explains the process by which different stages in production and
distribution of a product are under the ownership and control of a single enterprise. A
good example of verticle integration is the oil industry, where the major oil companies
own the rights to extract from the oil fields. they run a fleet of tankers, operate refineries
and have control of sales at their own felling stations, the extent of product
differentiation which affect cross- price elasticity of demand, the structure of buyers in
the industry including the possibility of monopsony power, the turnover of customers
(market churn) i.e. how many customers are prepared to switch their supplier over a
given time period when market conditions change. The rate of customer churn is
affected by the degree of consumer or brand loyalty and the influence of persuasive
advertising and marketing
1. Perfect competition is a common market structure with very desirable properties, so it is
useful to compare other market structure to competition. Competitive firms imply firms
which are rivals for the same customers.
i. Pure or perfect competition market

It is rare in the real world, but the model is important because it helps analyse industries with
characteristics similar to pure competition. i.e. perfect competitive market never has existed and
probably never will, we are studying it and the model is often used by economist because the
conclusion derived from the model have permitted accurate explanation and prediction of real
world

Features of perfectly competitive market

Perfect competitive market has the following characteristics

1. They are many sellers implies that their many firms enough so that a single seller’s decision
has no impact on market price. As noted above a good example of this characteristic can
be the rice, cotton, or coffee firm in Tanzania.
2. The products are standardized or homogenous to the extent that each seller’s product is
identical to its competitors. A good example can be tomatoes market at kariakoo.
3. Firms are price takers hence individual firms must accept the market price and can exert
no influence on price.
 4. There is a free entry and exit- no significant barriers prevent firms from entering or leaving
the industry
5. Perfect information about price, cost of production and market opportunities, buyers and
sellers are reasonably well- informed about items for sale
6. Each buyer and seller act independently. As long as everyone act independently, sellers
compete against one another for the consumer’s income

2. Imperfect competition

Under imperfect competition market structure the following structures can be discussed;

 Monopoly
 Monopolistic
 Oligopoly

ii. Monopoly
A pure monopoly exists when a single firm is the sole producer of a product for which
there are no close substitute. Examples are utilities and professional sports leagues.

Features/ characteristics of monopoly

1. Only one/ single seller, the firm and industry are synonymous.
2. Monopolist is a price – maker, has full control over price and output (The firm has
considerable control over the price because it can control the quantity supplied. The
demand is inelastic because no substitutes are available implying that the firm has
significant market power).
3. No close substitutes i.e a unique product and consumers have no reasonable alternative,
either to consume or to go without it
4. Entry is blocked/ barrier to entry
No competitions because there are barriers in entry which might be legally, economical or
ownership of essential resources
 The first noted barrier is the economies of scale which is considered to be the major
barrier. This occurs where the lowest unit cost and, therefore, low unit prices for
 consumer depend on the existence of small number of large firms or in the case of
monopoly, only one firm. Because a very large firm with a large market share is
most efficient, new firms cannot afford to start up industries with economies of
scale (for example Azam firm in Tanzania).
 The second barrier, natural monopoly as manifested in restriction given by the
government to issues likes public utilities. Public utilities are known as natural
monopolies because they have economies of scale in the extreme case. More than
one firm would be inefficient because the maze of pipes or wires that would result
if there were competition among water companies or cable companies. Therefore,
natural monopolies are often regulated monopolies.
 Legal barriers also exist in the form of patients and licenses, such as radio and TV
stations,
 Ownership or control of essential resources is another barrier to entry, such as the
professional sports leagues that control player contracts and leases on major city
stadium. It has to be noted that barrier is rarely complete. Think about the telephone
companies a couple decades ago; there was no substitute for the telephone.
Nowdays, cellular phones are very popular. It creates a substitute for your house
phone, causing the traditional telephone companies to lose their monopoly position.

These are actions y firms which create and protect monopoly power. These include
patient and copyrights, high advertising expenditure which results into high sunk
cost (cost that are not recoverable on exit, and illegal actions designed to restrict
competition. The government action also created Franchises and licensing (hunting
licensing system)
 There exists local monopoly which is monopoly that exists in a local geographical
area (e.g. Nile pitch processing industries in lake zone only. However, the solution
to these actions is through the use of proper antitrust policies)