Market Structures in Terms of Sellers,

Products, Pricing Power and Others

Perfect Competition
Market structures have elements that are organized, and oftentimes
institutionally regulated; such as system impacts pricing and distribution. The
term market structure describes the important characteristics, or features, of a
market. The first market structure to consider is perfect competition.
Perfectly competitive markets are assumed to have the following features:
1. There are many buyers and sellers- so many that each buys or sells only a
tiny fraction of the total market output. This assumption ensures that no
individual buyer or seller can influence the price.
2. Firms produce a standardized product, or a commodity. A commodity is
a product that is identical across suppliers, such as a sack of wheat, a sack of
corn, or a share of company stock. Because all suppliers offer an identical
product, no buyer is willing to pay more for one particular suppliers product.
 3. Buyers are fully informed about the price, quality, and availability of products,
and sellers are fully informed about the availability of all resources and technology.
4. Firm can easily enter or leave the industry. There are no obstacles preventing
new firms from entering profitable markets or preventing existing firms from
leaving unprofitable markets.

Table 1. Market structure describes the important characteristics of a market.

Market Feature Questions to Ask
1. Number of buyers and sellers Are there many, only a few or just one?
2. Product’s uniformity across suppliers Do firms in the market supply identical
products or are products differentiated across
firms?

3. Ease of entry into the market
4. Forms of competition among firms
Can new firms enter easily or do natural or
artificial barriers block them?
Do firms compete based only on prices, or
are advertising and product differences are
also important?
 If these conditions exist in a market, individual buyers and
sellers have no control over the price. Price is determined by
market demand and market supply. Once the market
establishes the price, each firm is free to supply whatever
quantity maximizes its profit or minimizes its loss. A perfectly
competitive firm is so small relative to the size of the
market that the firm’s quantity decision has no effect on
the market price. Any profit in this market attracts new firms
in the long run, which increases the market supply. This
reduces the market price. The lower price drives down the
profit in this market.
Examples of Perfectly Competitive Markets
Examples of perfect competition includes markets for the shares of large
corporations such telecommunication, food and beverages; markets for foreign
exchange, such as Yen, Euros, and Pounds; and markets for most agricultural
products, such as livestock, corn, and wheat. In these markets, there are so
many buyers and sellers that the actions of any one cannot influence the market
price.
In the perfectly competitive market for coconuts, for example, an individual
supplier is a coconut farm. In the world market for coconuts, there are tens of
thousands of coconut farms, so any one supplies just a tiny fraction of market
output. For example, the Philippine exports more than $1 billion worth of
coconut products to the United States, But no single coconut farmer can
influence the market price of coconuts. Any farmer is free to supply any amount
he or she wants to supply at the market price.
What are the features of perfect competition

A perfectly competitive market has the following characteristics:

• There are many buyers and sellers in the market.
• Each company makes a similar product.
• Buyers and sellers have access to perfect information about price.
• There are no transaction costs.
• There are no barriers to entry into or exit from the market.
Monopoly
The monopoly market structure is the opposite of the perfect competition
structure. A monopoly is the sole supplier of a product with no close
substitutes. The term monopoly comes from a Greek word meaning “one seller.”
A monopolist has more market power than does a business in another market
structure. Market power is the ability of a firm to raise its price without losing
all its sales to rivals. A perfect competition has no market power.
Barriers to Entry
A monopolized market has high barriers to entry, which are restrictions
on the entry of new firms into an industry. Barriers to entry allow a monopolist
to charge a price above the competitive price. If other firms could easily enter
the market, they would increase the market supply and thereby drive the price
down to the competitive level. There are three types of entry barriers: legal
restrictions, economies of scale, and control of an essential resource.
Legal Restrictions
Governments can prevent new firms from entering a market by
making entry illegal. Patents, licenses, and other legal restrictions
imposed by the government provide some producers with legal
protection against competition.

Governments in some cities confer monopoly rights to collect

garbage, offer bus and taxi service and supply other services ranging from
electricity to cable TV. The government itself may become a monopolist
by supplying the product and outlawing competition. For example, the
Philippine Postal Corporation has the exclusive right to deliver first-class
mail.
Economies of Scale
A monopoly sometimes emerges naturally when a firm experiences
substantial economies of scale. A single firm can sometimes satisfy
market demand at a lower average cost per unit than could two or more
small firms. Put another way, market demand is not great enough to
allow more than one firm to achieve sufficient economies of scale.

Thus, a single firm emerges from the competitive process as the sole
supplier in the market. For example, the transmission of electricity
involves economies of scale. Once wires are run throughout a
community, the cost of linking additional households to the power grid
is relatively small. The cost per household declines as more and more
households are wired into the system.
 A monopoly that emerges due to the nature of costs is called a natural
monopoly. A new entrant cannot sell enough output to experience the
economies of scale enjoyed by an established natural monopolist.
Therefore, entry into the market is naturally blocked.

In less-populated areas, natural monopolies include the only grocery

store, movie theatre, or restaurant for miles around. These are
geographic monopolies for products sold in local markets.

Control of Essential Resources

Sometimes the source of monopoly power is a firm’s control over
some resources critical to production. Following are some examples of
the control of essential resources barrier to entry.
• Diamond mining has control of 80 percent of the world’s diamond
supply and has the ability to limit supply to keep prices high.
 • China is a monopoly supplier of pandas to the world’s
zoos. The National Zoo in Washington, D.C., for example, rent
a pair of pandas from China for $1 million per year. As a way of
controlling the panda supply, China stipulates that any
offspring from the Washington pair becomes China’s property.
Other zoos have similar deals with China.
• The privately owned National Grid Corporation of the
Philippines (NGCP) is exclusively in charge of operating,
maintaining, and developing the Philippines interconnected
power-grid system that transmits electricity from its source to
its end users.
Monopolistic Competition and Oligopoly
You are now are of the extreme market structures of perfect competition
and monopoly. Next you will learn about monopolistic competition and
oligopoly, the two structures between the extremes in which most firms
operate. Firms in monopolistic competition are like golfers in a tournament
in which each player strives for a personal best.
Firms in oligopoly are more like players in a tennis match, where each
player’s actions depend on how and where the opponent hits the ball.

Monopolistic Competition
Monopolistic competition is a type of market structure where many
companies are present in an industry, and they produce similar but
differentiated products. None of the companies enjoy a monopoly, and each
company operates independently without regard to the actions of other
companies. The market structure is a form of imperfect competition.
The characteristics of monopolistic competition include the following:
• The presence of many companies
• Each company produces similar but differentiated products
• Companies are not price takers
• Free entry and exit in the industry
• Companies compete based on product quality, price, and how the product is
marketed

Companies in a monopolistic competition make economic profits in the short

run, but in the long run, they make zero economic profit. The latter is also a result
of the freedom of entry and exit in the industry. Economic profits that exist in the
short run attract new entries, which eventually lead to increased competition, lower
prices, and high output.

Such a scenario inevitably eliminates economic profit and gradually leads to

economic losses in the short run. The freedom to exit due to continued economic
losses leads to an increase in prices and profits, which eliminates economic losses.
 In addition, companies in a monopolistic market structure are productively
and allocatively inefficient as they operate with existing excess capacity. Because
of the large number of companies, each player keeps a small market share and is
unable to influence the product price. Therefore, collusion between companies
is impossible.

In addition, monopolistic competition thrives on innovation and variety.

Companies must continuously invest in product development and advertising
and increase the variety of their products to appeal to their target markets.
Competition with other companies is thus based on quality, price, and
marketing.

Quality entails product design and service. Companies able to increase the
quality of their products are, therefore, able to charge a higher price and vice
versa. Marketing refers to different types of advertising and packaging that can
be used on the product to increase awareness and appeal.
Monopolistic Competition vs. Perfect Competition
Companies in monopolistic competition produce differentiated products
and compete mainly on non-price competition. The demand curves in
individual companies for monopolistic competition are downward sloping,
whereas perfect competition demonstrates a perfectly elastic demand schedule.

However, there are two other principal differences worth mentioning –

excess capacity and mark up. Companies in monopolistic competition operate
with excess capacity, as they do not produce at an efficient scale, i.e., at the
lowest ATC. Production at the lowest possible cost is only completed by
companies in perfect competition.

Mark-up is the difference between price and marginal cost. There is no mark-up
in a perfect competition structure because the price is equal to marginal cost.
However, monopolistic competition comes with a product mark-up, as the price
is always greater than the marginal cost.
What is an Oligopolistic Market or Oligopoly?
The primary idea behind an oligopolistic market (an oligopoly) is that a few
companies rule over many in a particular market or industry, offering similar
goods and services. Because of a limited number of players in an oligopolistic
market, competition is limited, allowing every firm to operate successfully. The
situation typically breeds regular partnerships between firms and fosters a spirit
of cooperation.

An oligopoly is a term used to explain the structure of a specific market,

industry, or company. A market is deemed oligopolistic or extremely
concentrated when it is shared between a few common companies. The firms
comprise an oligopolistic market, making it possible for already-existing smaller
businesses to operate in the market dominated by a few.
 For example, major airlines like American Airlines and United Airlines
dominate the flight industry; however, smaller airlines also operate within the
space, offering special flights in the holiday niche or offering unique services as
Southwest does, providing special guest singers and entertainment on certain
flights.

Breaking Down Oligopolistic Markets and Firms

When thinking about oligopolistic companies, it’s important to note that
these are the firms that rule in an oligopolistic market. The businesses are
generally the trend and price setters, seeking out and forming partnerships and
deals that establish prices that are higher than the ruling companies’ marginal
costs. This means that oligopoly firms set prices to maximize their own profit.
Ultimately, it leads to partnerships and collaborations that foster success for
themselves and other firms, specifically smaller companies operating within the
same market or industry.
 If one firm in a market lowers its prices on goods and services, attaining
optimal sales growth, firms in direct competition usually follow suit, often
creating a price war. Oligopoly companies generally do not enter such price wars
and, instead, tend to funnel more money into research to improve their goods
and services, and into advertising that highlights the superiority of what they
offer over other companies with similar products.
Entering Oligopolistic Markets
Because of the structure of oligopolies, new firms typically find it difficult – if
not impossible – to tunnel into oligopolistic markets that already exist. This is
primarily due to two significant factors: several well-established and successful
large firms already dominate the space, and those companies typically offer the
most premium and well-known goods and services.

For new companies with similar offerings, breaking into an oligopoly is a

struggle. The only firms that typically manage to do so are those with significant
funding; an oligopolistic market requires large amounts of capital to operate in
because the economies of scale generally ensure that the status quo rarely changes.
 Oligopolies form when several dominant companies rule over a particular
market or industry, making collaboration and partnerships possible between
the firms that exist within them. While an oligopolistic setup can be incredibly
beneficial for companies already existing in the marketplace, they are equally as
hard to break into for new companies without substantial funds.