Market Structure

What is a Market?
• Place where there are many buyers and sellers .
• Actively engaged in buying and selling acts.
• Contact through different means of communication like
letters, telephone etc.
• Thus, It does not mean a particular place but the entire
area where buyers and sellers of a commodity are in
close contact and they have one price of same
commodity.
Market Structure
What is Market Structure?
It is therefore understood as those characteristics of a
market that influence the behavior and results of the
firms working in that market.

According to J.C. Edwards, “ A market is that mechanism

by which buyers and sellers are bought together. It is not
necessarily a fixed place.”
Characteristics
• Area: A market does not mean a particular place but the whole

region where sellers and buyers of a product are spread. Modern

modes of communication and transport have made the market
area for a product very wide.

• Buyers & Sellers: For exchange at least 1 buyer and 1

seller are needed. In the modem age, the physical presence of
buyers and sellers is not necessary in the market because they can
do transactions of goods through letters, telephones, internet, etc.
 Characteristics
• One Commodity: A market is not related to a place
but to a particular product. Hence, there are separate markets
for various commodities.

• Free Competition: There should be free competition

among buyers and sellers in the market. It is in relation to the
price determination of a product among buyers and sellers.

• One Price: The price of the product is same in the market

because of free competition among buyers and sellers.
Classification of Market
ON THE BASIS OF :
• Area or Region
• Time
• Functions
• Nature of Commodity
• Legality
ON THE BASIS OF
TIME
• Very short period market: It can be classified into
Daily(perishable products) or weekly market(on any specific
day of week). It is which takes part in transaction for a short
period of time as for few hours or a day. In this supply of
product can not be increased.

• Short period market: In this supply of product can be

increased but we can not make any change in production

plant according to changed demand.
ON THE BASIS OF
TIME
• Long period market: It is in which we can make

necessary changes in plant and machinery as well increase

supply of product according to its demand.

• Very long period market: There can be large

change in supply of the product. And demand also increases

because of change in population, habits, taste, customs etc.
TYPES OF MARKET
STRUCTURE

• Perfect Competition
• Monopoly Competition
• Monopolistic Competition
• Oligopoly Competition
PERFECT COMPETITION
• It is such a market structure where there are large numbers of sellers
and buyers.
• Homogeneous product .
• The price of the product is determined by the industry .
• One price prevails in the market and all the firms sell the product at
the prevailing price .
• Perfect competition is an economic term that refers to a theoretical market
structure in which all suppliers are equal and overall supply and demand are
in equilibrium. For example, if there are several firms producing a commodity
and no individual firm has a competitive advantage, there is perfect competition.
CHARACTERSTICS
 Large numbers of buyers and sellers in the market.
 Free entry and exit of firms in the market.

 Each firm should be selling a homogeneous product.

 Buyers and sellers should possess complete knowledge

of the market.
 No price control.
LY
 A monopoly market is a form of market where the whole supply of
a product is controlled by a single seller. There are three essential
conditions to be met to categorize a market as a monopoly market.
 There is a Single Producer - The product must have a single
producer or seller. That seller could be either an individual, a joint-
stock company, or a firm of partners. This condition has to be met
to eliminate any competition.
 There are No Close Substitutes - There will be a competition if
other firms are selling similar kinds of products. Hence in a
monopoly market, there must be no close substitute for the product.
 Restrictions on the Entry of any New Firm - There needs to be a
strict barrier for new firms to enter the market or produce similar
products.
CHARACTERSTICS
 The product has only one seller in the market.
 Monopolies possess information that is unknown to others in the
market.
 There are profit maximization and price discrimination associated
with monopolistic markets. Monopolists are guided by the need to
maximize profit either by expanding sales production or by raising
the price.
 It has high barriers to entry for any new firm that produces the same
product.
 The monopolist is the price maker, i.e., it decides the price, which
maximizes its profit. The price is determined by evaluating the
demand for the product.
 The monopolist does not discriminate among customers and charges
them all alike for the same product.
 Reasons for the Existence of Monopoly Market
 Monopolies arise in the market due to the following three
reasons.
1. The firm owns a key resource, for example, Debeers and
Diamonds.
2. The firm receives exclusive rights by the government to produce a
particular product. Like patents on new drugs, the copyright for
books or software, etc.
3. One producer can be more efficient than others due to the cost
of production. This gives rise to increasing returns on sale. Few
examples are American electric power, Columbia Gas.
MONOPOLISTIC
COMPETITION
 Monopolistic competition exists when many companies offer
competing products or services that are similar, but not perfect,
substitutes.
 The barriers to entry in a monopolistic competitive industry are low,
and the decisions of any one firm do not directly affect its competitors.
The competing companies differentiate themselves based on pricing
and marketing decisions.
 Monopolistic competition exists between a monopoly and
perfect competition, combines elements of each, and includes
companies with similar, but not identical, product offerings.
 Restaurants, hair salons, household items, and clothing are examples of
industries with monopolistic competition. Items like dish soap or
hamburgers are sold, marketed, and priced by many competing
companies.
CHARACTERSTICS
• Large number of firms

• Product differentiation

• Freedom of entry and exit

• Non price competition

• Price policy

• Less mobility

• No perfect knowledge

• Selling cost

• Close substitutes
 Monopolistic competition provides both benefits and pitfalls
for companies and consumers.
• Pros
• Few barriers to entry for new companies
• Variety of choices for consumers
• Company decision-making power for prices and marketing
• Consistent quality of product for consumers
• Cons
• Many competitors limits access to economies of scale
• Inefficient company spending on marketing, packaging and
advertising
• Too many choices for consumers means extra research for
consumers
• Misleading advertising or imperfect information for consumers
WHAT IS THE DIFFERENCE BETWEEN MONOPOLISTIC
COMPETITION AND PERFECT COMPETITION?

 In perfect competition, the product offered by competitors

is the same item. If one competitor increases its price, it will
lose all of its market share to the other companies based on
market supply and demand forces, where prices are not set
by companies and sellers accept the pricing determined by
market activity.
 In monopolistic competition, supply and demand forces do
not dictate pricing. Firms are selling similar, yet distinct
products, so firms determine the pricing. Product
differentiation is the key feature of monopolistic
competition, where products are marketed by quality or
brand. Demand is highly elastic, and any change in pricing
can cause demand to shift from one competitor to another.
OLIGOPOLY
• It is a market structure in which there are few sellers of a
product selling identical or differentiated products .
• If they are selling identical products, it’s a case of Pure
Oligopoly.
• If they are selling differentiated products, it’s a case of
Differentiated Oligopoly .
• Oligopolies in history include steel manufacturers, oil companies, railroads, tire
manufacturing, grocery store chains, and wireless carriers. The economic and legal
concern is that an oligopoly can block new entrants, slow innovation, and increase
prices, all of which harm consumers.
 KEY TAKEAWAYS
• The term "oligopoly" refers to a small number of producers
working, either explicitly or tacitly, to restrict output and/or
fix prices, in order to achieve above normal market returns.
• Economic, legal, and technological factors can contribute
to the formation and maintenance, or dissolution, of
oligopolies.
• The major difficulty that oligopolies face is the prisoner's
dilemma that each member faces, which encourages each
member to cheat.
• Government policy can discourage or encourage
oligopolistic behavior, and firms in mixed economies often
seek government blessing for ways to limit competition.
STICS
• Relatively small number of sellers
• Interdependence of the firms
• Price rigidity and price war
• Difficulty in entry and exit
• Selling Costs
• Indeterminateness of the demand curve
• Complex market structure