The Market Structure

Market Structure has been a topic of discussion for many economists like Adam
Smith and Karl Marx who have strong conflicting viewpoints on how the market operates in
presence of political influence. Adam Smith in his writing on economics stressed the importance
of laissez-faire principles outlining the operation of the market in the absence of dominant
political mechanisms of control, while Karl Marx discussed the working of the market in the
presence of a controlled economy [1]sometimes referred to as a command economy in the
literature. Both types of market structure have been in historical evidence throughout the
twentieth century and twenty-first centuries.

Based on the factors that decide the structure of the market, the main forms of market
structure are as follows:

 Perfect competition, refers to a type of market where there are many buyers and seller that
feature free barriers to entry, dealing with homogeneous products with no differentiation,
where the price is fixed by the market. Individual firms are price taker as the price is set by
the industry as a whole. Example: Agricultural products which have many buyers and sellers,
selling homogeneous goods where the price is determined by the demand and supply of the
market and not individual firms.
o Imperfect Competition refers to markets where standards for perfect competition are
not fulfilled (such as no barriers for entry and exit, homogeneous products and many
buyers and sellers). All other types of competition come under imperfect competition.

 Monopolistic competition, a type of imperfect competition where there are many sellers,
selling products that are closely related but differentiated from one another (e.g. quality of
products may differentiate) and hence they are not perfect substitutes. This market structure
exists when there are multiple sellers who attempt to seem different from one another.
Examples: toothpaste, soft drinks, clothing as they all are homogeneous products with many
buyers and sellers, no to low entry barriers but are different from each other due to quality,
taste, branding. Firms have partial control over the price as they are not price takers (due to
differentiated products) or Price Maker (as there are many buyers and sellers).

 Oligopoly, refers to market structure where only small number of firms operate together
control the majority of the market share. Firms are neither price takers nor makers. Firms
tend to avoid price war by following price rigidity. They closely monitor the prices of their
competitors and change prices accordingly. Oligopoly firms focus on quality and efficiency
of their products to compete with other firms. Example: Network providers (Entry barriers,
Small number of sellers, many buyers, products can be homogeneous or differentiated).

The three types of oligopoly:

o Duopoly, a special case of an oligopoly where two firms operate and have power over
the market. Example: Aircraft manufactures: Boeing and Airbus.
o Oligopsony, a market where many sellers can be present but meet only a few buyers.
Example: Cocoa producers
 o Cournot quantity competition, one of the first models of oligopoly markets was
developed by Augustin Cournot in 1835. In Cournot’s model, there are two firms and
each firm selects a quantity to produce, and the resulting total output determines the
market price.
o Bertrand Price Competition, Joseph Bertrand was the first to analyze this model in
1883. In Bertrand’s model, there are two firms and each firm selects a price to maximize
its own profits, given the price that it believes the other firm will select.

 Monopoly, where there is only one seller of a product or service which has no substitute.
The firm is the price maker as they have control over the industry. There are high barriers to
entry, which an incumbent would conduct entry-deterring strategies if keeping out entrants
reaping additional profits for the company. Frank Fisher, a noticed antitrust economist has
described monopoly power as “the ability to act in an unconstrained way,” such as increasing
price or reducing quality. Example: Google
o 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.
o Or natural obstacles, such as the sole ownership of natural resources, De beers was a
monopoly in the diamond industry for years.
o Monopsony, when there is only a single buyer in a market. Discussion of monopsony
power in the labor literature largely focused on the pure monopsony model in which a
single firm comprised the entirety of demand for labor in a market (e.g., company town).

Features of market structures

The imperfectly competitive structure is quite identical to the realistic market conditions
where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and
dominate the market conditions. The elements of Market Structure include the number and size
of sellers, entry and exit barriers, nature of product, price, selling costs.

Competition is useful because it reveals actual customer demand and induces the seller
(operator) to provide service quality levels and price levels that buyers (customers) want,
typically subject to the seller's financial need to cover its costs. In other words, competition can
align the seller's interests with the buyer's interests and can cause the seller to reveal his true
costs and other private information. In the absence of perfect competition, three basic
approaches can be adopted to deal with problems related to the control of market power and an
asymmetry between the government and the operator with respect to objectives and
information: (a) subjecting the operator to competitive pressures, (b) gathering information on
the operator and the market, and (c) applying incentive regulation.

The correct sequence of the market structure from most to least competitive is perfect
competition, imperfect competition, oligopoly, and pure monopoly. The main criteria by which
one can distinguish between different market structures are: the number and size of firms and
consumers in the market, the type of goods and services being traded, and the degree to which
information can flow freely. In today's time, Karl Marx's theory about political influence on
market makes sense as firms and industry are affected strongly by the regulation, taxes, tariffs,
patents imposed by the government. These affect the barriers to entry and exit for the firms in
the market.