Market Structure

Market structure refers to the way that various industries are classified
and differentiated in accordance with their degree and nature of
competition for products and services. It consists of four types: perfect
competition, oligopolistic markets, monopolistic markets, and
monopolistic competition.

Types of Market Structure:

According to economic theory, market structure describes how firms are differentiated
and categorized by the types of products they sell and how those items influence their
operations. A market structure helps us to understand what differentiates markets from
one another.

1. Monopolistic competition, also called competitive market, where there is a large

number of firms, each having a small proportion of the market share and slightly
differentiated products.
2. Oligopoly, in which a market is by a small number of firms that together control the
majority of the market share.
3. Duopoly, a special case of an oligopoly with two firms.
4. Monopsony, when there is only one buyer in a market.
5. Oligopsony, a market in which many sellers can be present but meet only a few
buyers.
6. Monopoly, in which there is only one provider of a product or service.
7. Natural monopoly, a monopoly in which economies of scale cause efficiency to
increase continuously with the size of the firm. A firm is a natural monopoly if it is able
to serve the entire market demand at a lower cost than any combination of two or
more smaller, more specialized firms.
8. Perfect competition, a theoretical market structure that features no barriers to entry,
an unlimited number of producers and consumers, and a perfectly elastic demand
curve.
 Monopolistic Market:
A monopolistic market is a theoretical condition that describes a market where only one
company may offer products and services to the public. A monopolistic market is the
opposite of a perfectly competitive market, in which an infinite number of firms operate.
In a purely monopolistic model, the monopoly firm can restrict output, raise prices, and
enjoy super-normal profits in the long run.

Features:
 There are many producers and many consumers in the market, and no business has
total control over the market price.
 Consumers perceive that there are non-price differences among the competitors'
products.
 There are few barriers to entry and exit.
 Producers have a degree of control over price.

Examples of monopolistic competition:

 Restaurants – restaurants compete on quality of food as much as
price. Product differentiation is a key element of the business. There
are relatively low barriers to entry in setting up a new restaurant.
 Hairdressers. A service which will give firms a reputation for the
quality of their hair-cutting.
 Clothing. Designer label clothes are about the brand and product
differentiation
 TV programmes – globalisation has increased the diversity of tv
programmes from networks around the world. Consumers can
choose between domestic channels but also imports from other
countries and new services, such as Netflix.

Diagram monopolistic competition in short run

The firm maximizes profit where MR=MC. This is at output Q1
and price P1, leading to supernormal profit.

Monopolistic competition in long run

In the long-run, supernormal profit encourages new firms to enter.

This reduces demand for existing firms and leads to normal profit.

Oligopoly Market:
An oligopoly is a type of market structure that exists within an economy. In
an oligopoly, there is a small number of firms that control the market. A key
characteristic of an oligopoly is that none of these firms can keep the
other(s) from having significant influence over the market. The
concentration ratio measures the market share of the largest firms. There
 is no precise upper limit to the number of firms in an oligopoly, but the
number must be low enough that the actions of one firm significantly
influence the others. An oligopoly is different from a monopoly, which is a
market with only one producer.

Features:
 Number of firms: "Few" – a "handful" of sellers. There are so few firms that the
actions of one firm can influence the actions of the other firms.

 Long run profits: Oligopolies can retain long run abnormal profits. High barriers
of entry prevent sideline firms from entering the market to capture excess profits.

 Product differentiation: Product may be homogeneous (steel) or differentiated

(automobiles).

 Perfect knowledge: Assumptions about perfect knowledge vary but the

knowledge of various economic factors can be generally described as selective.
Oligopolies have perfect knowledge of their own cost and demand functions but their
inter-firm information may be incomplete. Buyers have only imperfect knowledge as to
price, cost and product quality.

 Non-Price Competition: Oligopolies tend to compete on terms other than

price. Loyalty schemes, advertisement, and product differentiation are all examples of
non-price competition
 Perfect Competition Market:
The term perfect competition refers to a theoretical market structure. Although perfect
competition rarely occurs in real-world markets, it provides a useful model for
explaining how supply and demand affect prices and behavior in a market economy.

Under perfect competition, there are many buyers and sellers, and prices reflect supply
and demand. Companies earn just enough profit to stay in business and no more. If
they were to earn excess profits, other companies would enter the market and drive
profits down.

Features:
 Infinite buyers and sellers – An infinite number of consumers with
the willingness and ability to buy the product at a certain price, and infinite
producers with the willingness and ability to supply the product at a
certain price.
 Zero entry and exit barriers – A lack of entry and exit barriers
makes it extremely easy to enter or exit a perfectly competitive market.
 Perfect factor mobility – In the long run factors of production are
perfectly mobile, allowing free long term adjustments to changing market
conditions.
 Perfect information - All consumers and producers are assumed to
have perfect knowledge of price, utility, quality and production methods of
products.
 Zero transaction costs - Buyers and sellers do not incur costs in
making an exchange of goods in a perfectly competitive market.
 Profit maximizing - Firms are assumed to sell where marginal costs
meet marginal revenue, where the most profit is generated.
 Homogenous products - The qualities and characteristics of a
market good or service do not vary between different suppliers.
 Non-increasing returns to scale - The lack of increasing returns
to scale (or economies of scale) ensures that there will always be a
sufficient number of firms in the industry.

Monopoly Market:
A monopoly is a market structure where a single seller or producer
assumes a dominant position in an industry or a sector. Monopolies are
discouraged in free-market economies as they stifle competition and limit
substitutes for consumers.

In the United States, antitrust legislation is in place to restrict monopolies,

ensuring that one business cannot control a market and use that control to
exploit its customers.

Features:
1. Single Seller of the Product: In a monopoly market, usually, there is a single firm
which produces and/or supplies a particular product/ commodity. It is fair to say that such a firm
constitutes the entire industry. Also, there is no distinction between the firm and the industry.

2. Entry Restrictions: Another feature of a monopoly market is restrictions of entry. These

restrictions can be of any form like economical, legal, institutional, artificial, etc.

3. No Close Substitutes: Usually, a monopolist sells a product which does not have any
close substitutes. Therefore, the cross elasticity of demand for such a product is either zero or very
small. Also, the price elasticity of demand for the monopolist’s product is less than one. Hence, in
the monopoly market, the monopolist faces a downward sloping demand curve.

4. Price Maker: Since there is only one firm selling the product, it becomes the price maker
for the whole industry. The consumers have to accept the price set by the firm as there are no other
sellers or close substitutes.
 Market Performance:
Market performance refers to how well financial markets, such as stock markets, bond
markets, or commodity markets, are doing in terms of their overall health and activity. It
is typically measured through various indicators and metrics that provide insights into
the state of the market. Here are some key aspects and metrics used to assess market
performance:

1. Stock Market Performance: The performance of stock markets is often

assessed using key indices like the S&P 500, Dow Jones Industrial Average, and
NASDAQ Composite. These indices track the overall movements of the stock market by
measuring the performance of a representative group of stocks.

2. Market Indices: Market indices are constructed to represent the performance of a

specific segment of the market, such as sector-specific indices or regional indices.
Examples include the FTSE 100 (UK), DAX (Germany), and Nikkei 225 (Japan).

3. Price Trends: Observing the direction of price movements is essential. A rising

market is often seen as a sign of positive performance, while a declining market
suggests poor performance.

4. Trading Volume: High trading volume usually indicates increased market activity
and liquidity, which can be a positive sign. Low trading volume might signal less interest
and lower market performance.

5. Volatility: Market volatility, as measured by metrics like the VIX (CBOE Volatility
Index), reflects the degree of price fluctuation in the market. Higher volatility can
indicate market uncertainty.

6. Economic Indicators: Economic indicators like GDP growth, employment rates,

and inflation can impact market performance. A strong economy is generally associated
with a robust stock market.

7. Company Earnings: The earnings reports of individual companies are closely

watched. Positive earnings reports can boost market performance, while disappointing
results can have a negative impact.

8. Interest Rates: Central banks' policies and interest rate changes can influence the
cost of borrowing and investment decisions, which, in turn, affect market performance.
9. Political and Geopolitical Events: Political stability and geopolitical events
can significantly impact market performance. Events like elections, trade disputes, or
conflicts can lead to market volatility.

10. Investor Sentiment: Investor sentiment, often measured through surveys and
sentiment indicators, can affect market performance. Positive sentiment can drive
investment and trading activity, while negative sentiment can lead to sell-offs.

11. Market Capitalization: The total market capitalization of a stock exchange or a

specific sector can provide insight into market performance. A growing market cap
suggests a thriving market.

12. Market Breadth: Market breadth indicators, such as the advance-decline ratio,
measure the number of advancing and declining stocks. A broad-based rally is often
seen as a positive sign.

13. Long-Term vs. Short-Term Performance: Assessing both short-term and

long-term market performance is important. Short-term fluctuations can be influenced by
various factors, while long-term performance reflects the overall health of the market.

14. Market Structure: The structure of the market is a fundamental aspect of performance
assessment. Common market structures include perfect competition, monopolistic
competition, oligopoly, and monopoly. The level of competition in an industry can significantly
impact its performance.

15. Market Conduct: The conduct of firms within the industry is crucial. This includes
examining pricing strategies, advertising, product differentiation, and other behaviors that firms
engage in to gain a competitive advantage.

16. Market Performance Indicators: Various performance indicators are used to assess
the efficiency and competitiveness of industrial markets, such as:

- Price Levels: Are prices competitive, or do they exhibit signs of monopolistic behavior?

- Consumer Choice: To what extent do consumers have choices in products and services?

- Product Quality: Does the market promote innovation and product quality?

- Productivity: Are firms operating efficiently to produce goods and services?

- Market Share and Concentration: What is the market share distribution among firms? Is
there high market concentration or fragmentation?
17. Barriers to Entry: Barriers to entry can impact market performance. High barriers can
limit new entrants, potentially leading to less competitive markets.

18. Regulations: Government regulations, such as antitrust laws, can play a significant role in
shaping market performance. Regulations can promote competition or restrict anti-competitive
behavior.

19. Consumer Welfare: Evaluating how market performance affects consumers is essential.
Are consumers benefitting from lower prices, improved product quality, and greater choice?

20. Firm Profits: The profitability of firms in the industry is another indicator. High and
sustained profits may suggest a lack of competition, while low or unstable profits can indicate
intense competition.

21. Market Dynamics: The dynamics of the market, including how firms enter and exit the
market, mergers and acquisitions, and technological changes, can affect performance.

22. Innovation: Assessing the industry's ability to innovate and adapt to technological
changes is crucial for long-term performance.

23. Long-Term Viability: Examining whether the market's performance is sustainable over
the long term is an important aspect of industrial economics.

Market performance in industrial economics can be analyzed through quantitative methods,

economic modeling, and case studies. Researchers and policymakers use this analysis to
identify potential issues in markets, recommend policy changes, and promote competition,
efficiency, and consumer welfare within industrial sectors.