MARKET STRUCURE

What is market structure?

Market refers to an interaction of economic agents,
government or a firm carrying out transaction. In other way we
can say Market is a place where buyers and sellers are
exchanging goods and services.
Therefore, the market does not necessarily mean, a place for
buyers and sellers meet to exchange products but just
interaction of these agents of the economy.
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So, Market structure refers to the way that various
firms are classified and differentiated with their
degree and nature of competition for good and
services. That is either with, without or minimal
competition, market structure will be born.
 Types of market structure

i. Perfect competition market

ii.Monopoly market

iii.Monopolistic competition market

iv.Oligopoly market
 What determine and differentiate market structures?

i. Number of sellers in the market, either one seller, few sellers, or many sellers.

ii. To what extent are firms free to enter or leave the industry?

iii. The products sold and bought are differentiated or identical from each other.

iv. Ability of the seller to influence price at which the product is to be sold in the market. That,
is the seller selling at price set by the market forces, other sellers or by the seller himself?

v. The degree to which a seller can attract more customers against competitors by applying
other techniques like marketing rather that medium of exchange in the market
 1.PERFECT COMPETITION

Perfect competition is a theoretical market structure in

which there is many buyers and sellers, offering
homogeneous product, under such condition were by no
firm can influence on the market price. Thus, a firm in a
perfectly competitive market is a price taker and can
sell any amount of the commodity at the prevailing
market price.
 Features/Assumptions of a Perfect Competition

 Large number of buyers and sellers: in a perfect competition, there is existence of many buyers
and sellers such that none can influence on the market price. Thus, both firms and buyers are
price takers, and the price is determined by the market forces of demand and supply.

 Homogenous product: all the products produced by all the firms in the industry must be identical
in all aspects, i.e., the size, color, and shape. This means that the products are perfect substitutes.

 Perfect knowledge: Both the buyers and the sellers in a perfect competition have perfect
knowledge of the market conditions, thus a buyer cannot be charged a price higher than the
market price and a seller cannot accept any price lower than the market price.
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 No barriers to entry or exit: There is complete freedom for any firm to enter
or exit the market. New firms enter the market when the existing firms are
making super normal profits, and when there is loss in the industry some of
the firms choose to leave the market.

 No government intervention: There are no government restrictions on supply

or price controls. There are also no taxes in a perfect competition. Thus, the
price is only influenced by the forces of demand and supply.
 Why do we study Perfect Competition?

A perfect competition is a theoretical market structure

that does not exist, but we do study it because it serves
as a model for understanding the market structures that
do exist. There is market that are close to perfect
competition but not exact. Thus, the perfect competition
is there to show us how things should be in the market.
 Short run Profit Maximization in a Perfect
Competition

In the short run, the firm maximizes its profits when the positive difference between
total revenue and total cost is at its maximum. At this point, the marginal revenue
(MR) is equal to the marginal cost (MC). Since the firm can produce any amount at
the prevailing market price, its demand curve is vertical and is the same as the MR
curve, and also the price (P) is the same as the marginal revenue (MR).

The firm therefore, maximizes profits with the output at which the marginal cost
(MC) is equal to the marginal revenue (MR) or price (P)
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Consider the illustration:
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Market demand rises from D1 to D2 causing the price to
rise from P1 to P2. Due to the rise in price to P2, profits
are now maximised at Q2. A firm’s marginal cost (MC)
curve is effectively its supply curve. At Q2, (P2, AR is
greater than AC) and therefore the firm now makes
supernormal profit.
 MONOPOLY MARKET

A monopoly market refers to a market structure

with a single seller (also known as a monopolist)
but with many buyers. Monopoly is a “price
maker” and produces the entire supply of a
particular good or service that has no close
substitute. Example of monopoly in Tanzania is
such as TANESCO.
Characteristics / Feature of monopoly market.

1. There is single seller in the market.

2. There are no close substitutes of goods or service produced.

3. There is restriction for entry and exit for the firm in the
market.

4. The firm is the price maker.

 Sources of Monopoly Power

Exclusive control over important inputs.

Large control or complete control over necessary inputs for production cause some companies
to become the sole power in an industry, as competitors cannot form due to lack of inputs.

Patents.

A patent refers to the right to exclusive benefit from all exchanges involving the invention to
which it applies. They can be harmful and beneficial for a market, as they give rise to
monopolistic powers, but without them some inventions would not occur at all.
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Government licenses of franchises.

Government or local authorities can give out licenses for firms in certain areas in which more
than one firm would be harmful, however they come with regulations and restrictions.

Sunk costs.

These are costs which cannot be recovered when a company stops production, such as research
costs, installation cost and production plant costs. Many firms fail to enter the industry which
require large initial capital, resulting to monopoly to a firm which can afford the costs.
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Location.

Because of the existence of one seller at a particular place selling a

particular product which is not sold at that place, such a seller become
the monopoly of the product at that place compared to a place with
many sellers selling the same product from other places.
 Types of Monopolies

i. The Pure Monopoly is a single seller in a market or sector with high barriers to
entry such as significant start up costs whose product has no substitutes.
Microsoft Corporation was the first company to hold a pure monopoly position
on personal computer operating systems. As of 2022, its desktop Windows
software still held a market share of 75%.
ii. The Natural Monopoly, a natural monopoly develops in reliance on unique raw
materials, technology, or specialization. Companies that have patents or
extensive research and development costs such as pharmaceutical companies are
considered natural monopolies.
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Public Monopolies, they provide essential services and goods,
such as the utility industry as only one company commonly
supplies energy or water to a region. The monopoly is allowed
and heavily regulated by government municipalities and rates
and rate increases are controlled. Example Tanesco
 Advantages of monopoly
 Stability of prices

In a monopoly market structure the price tend to be pretty stable. This is because there is only one firm
involved in the market that sets the prices since there is no competing product. This is different in
other types of market structures prices that are not stable and tend to be elastic because of competition.

 Research and development

As the monopolist s making supernormal and abnormal profits, the firm can invest the money in
research and development. Customer will get a better quality product at reduced price leading to
enhanced consumer surplus and satisfaction.
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Economies of scale

Since there is a single seller in the market it leads to economy of scale

because big scale production which lowers the cost per unit for the
seller. The seller may then pass this benefit down to the consumer in
terms of a lower price.
 Disadvantages of monopoly
• Consumers have a small range of choice.
• It reduces consumer sovereignty.
• Monopolist may put very high prices hence exploiting the consumers
and reducing their purchasing power and resulting in a decline in
consumer surplus
• Quality of goods. Due to the fact that there is no completion in the
market, a monopolist can often produce low quality goods to save cost
of production and make more profits.
• Unfair practice of trade
 Assumptions of a monopoly market

• There is only one producer or seller in the

market and products are homogenous.
• There is no substitutes product
• Firm is a price maker
• There are barriers to entry,
 Degree of price discrimination.
Degree of price discrimination refers to the extent
where an industry or firm can segment the market
and maximizes profit by extracting the consumers
surplus. There are 3 ways that a market can be
segmented, which in economic terms are
considered as 3 degrees of price discrimination.
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1. First-Degree price discrimination

2. Second-degree price discrimination

 Maximizing profit in a monopoly market

Like any other firm, the monopolist maximizes profits by producing the
output at which the marginal cost (MC) is equal to the marginal revenue
(MR). It is at that point that the difference between total revenue and
total cost will be maximum. Since the monopolist is the price maker, the
firm will set a price that corresponds to the demand for the product.
Consider the illustration below:
 MONOPOLISTIC COMPETITION
Monopolistic competition is a market structure in which there are many
firms selling differentiated products. Monopolistic competition
combines elements of monopoly and competitive markets. Essentially a
monopolistic competitive market is one with freedom of entry and exit,
but firms can differentiate their products. Therefore, they have an
inelastic demand curve and so they can set prices.
 Features of monopolistic competitive
i. Buyers and sellers are many in the market

ii. Products produced are slightly differentiated

iii.There are minimal barriers to entry or exit in the market

iv.Firms have same cost and demand function

v. Each firm have got a power to determine and set price of the output
price control
Examples of monopolistic competition market

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 rather than price.
Monopolistic competition in the short run
At profit maximization, MC = MR, and output is Q and price P. Given
that price (AR) is above AC/ATC at Q, supernormal profits are possible
(area PABC).
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As new firms enter the market, demand for the existing firm’s products
becomes more elastic and the demand curve shifts to the left, driving
down price. Eventually, all super-normal profits are eroded away.
 Monopolistic competition in the long run
Super-normal profits attract in new entrants, which shifts the demand
curve for existing firm to the left. New entrants continue until only
normal profit is available. At this point, firms have reached their long
run equilibrium.
Clearly, the firm benefits most when it is in its short run and will try to stay in the short run by innovating,
and further product differentiation.
 Lessons for Managers
i. A firm must concentrate on differentiation and building brand value

ii. The managers must never be complacent with their profit because of new
entrants.

iii.The market is competing with differentiated products at lowest price.

iv.Need not offer at low price always. Through supplying best products, he can
retain his price and profit.
OLIGOPOLY MARKET

An oligopoly market is the market structure that has few

firms dominate the market. The firms in oligopoly
market are producing homogeneous or slightly
differentiated products and the only character that
distinguish oligopoly market from the other market
structures is that, in oligopoly market firms are
interdependent in nature; this means that the firms are
depending to each other.
 CHARACTRERISTICS OF AN OLIGOPOLY
MARKET
• Domination of few sellers in the market
• Interdependence among the firms
• High competition in the market
• High level of advertisement
• There is entry and barriers in the market
• Lack of uniformity
 KINKED DEMAND CURVE OF
OLIGOPOLY MARKET
The model was developed by Sweezy, and it suggest
that price is rigid the firm's will face different effects for
both increasing and decreasing price. Competing firm's
will behave differently to the price increase and this is
what cause a kink to occur in the demand curve, , the
model explains that if one firm in an oligopoly market
will increase price of its goods the buyers will stop from
buying from that firm and will start to buy from firm's
therefore other firm's will not follow this decision on
increasing price
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the price increase from one firm may cause decrease in

demand hence demand becomes elastic but if a firm will cut
the price other firm's will follow that decision by cutting their
prices therefore demand becomes inelastic. (Wilkinson. N,
managerial economics, 2005)
 Price leadership
Oligopolistic industries show a commonly observed pattern of behavior
where a particular firm initiates price or sets a price and the other firms
follow the leader within a short time lag, normally a few days. There are
two ways in which such behavior can occur depending on the factors as
follows
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• Product differentiation.
Products which are homogeneous normally the followers
adjust the prices to follow their leader
• Type of leadership
There are two main types here. Dominant price leadership can
be defined as the situation where the price leader is normally
the largest firm in the industry. The other type of price
leadership is barometric price leadership where it is not
necessarily the dominant firm (largest), where the leaders can
also change