MARKET STRUCTURE

Market is a set of buyers, a set of sellers and a commodity and there is a price of a commodity. A market is system by which buyers and sellers bargain for the price of a product, settle the price and transact their business.

Definitions of Market
Market refers to a particular place where goods are bought and sold. In economics Market refers to the whole area where buyers and sellers of a product spreads. The terms market refers not necessarily to a place but always to a commodity and the buyers and sellers who are in direct competition with one another. Prof. R. Chapman Market is not a particular place in which things are bought and sold but the whole of any region in which buyers and sellers are in such free intercourse with one another that the price of the same goods tends to equality, easily and quickly. Prof. A.A.Cournot

Market Structure

It refers to the nature and degree of competition in the market for goods and services.

Determinants of Market Structure

1. 2. 3. 4. Number and Nature of Sellers Number and Nature of Buyers Entry and Exit Conditions Nature of the product homogenous (identical), differentiated? 5. Economies of scale

Classification of Market Structure

1.

2.
3. 4. 5.

Perfect Competition Monopolistic Competition Oligopoly Duopoly Monopoly

Market Structure
Perfect Competition Pure Monopoly

Monopolistic Competition

Oligopoly

Duopoly Monopoly

The farther right on the scale, the greater the degree of monopoly power exercised by the firm.

Summary of Market Structures

Characteristic Number of firms Nature of product Perfect Oligopoly Competition Many Few Homogenous Monopolistic Monopoly Competition Varied but not One too many Homogenous or Product Limited or One Differentiated Differentiation product High Incomplete Less elastics Free Incomplete Less elastics High or No Entry Incomplete Less elastics

Barriers to entry Market Knowledge Elasticity of Demand

None Complete Perfectly elastic Price taker Equal High Weak Zero

Price Policy of Firm

AR and MR Economic efficiency Innovative behaviour Degree of Monopoly Power

Price maker
Different Low Very Strong Limited due to product differentiation

Price maker
Different

Price maker
Different Low Potentially strong

Limited

Full

Market Structure: Perfect Competition

Perfect competition is a market structure in which all firms in an industry are price takers and in which there is freedom of entry into and exit from industry. R.G.Lipsey

Characteristics:

1. Free entry and exit to industry 2. Large number of buyers and sellers no individual seller can influence price 3. Homogenous product identical so no consumer preference 4. Sellers are price takers have to accept the market price 5. Perfect information available to buyers and sellers 6. Perfect mobility of goods and factors 7. Absence of transport costs 8. Absence of selling costs

Market Structure: Perfect Competition

Examples of perfect competition: Financial markets stock exchange, currency markets, bond markets? Agriculture?

Market Structure: Monopolistic Competition

It refers to a market situation where there are many firms selling a differentiated product. It refers to competition among a large number of sellers producing close but not perfect substitutes for each other. Features Many buyers and sellers Product differentiation Relatively free entry and exit Each firm may have a tiny monopoly because of the differentiation of their product Non-price competition Existence of selling costs

Examples restaurants, professions solicitors, etc., building firms plasterers, plumbers, etc.

Market Structure: Oligopoly

It is a market situation in which there are a few firms selling homogenous or differentiated product. Oligopoly may be pure-oligopoly and imperfect oligopoly. Pure or perfect oligopoly produces homogenous products, whereas imperfect or differentiated oligopoly produces heterogeneous products. Examples of Pure oligopoly:

Industrial products such as aluminium, steel, copper, zinc

Examples of Imperfect oligopoly:

Automobiles, cigarettes, TV, Tyres, Laptops etc.

Market Structure: Oligopoly

Characteristics:
1. High degree of interdependence between firms 2. Industry dominated by small number of large firms 3. Many firms may make up the industry 4. No barriers to entry and exit 5. High competition 6. Advertisement 7. Lack of uniformity in size of firm 8. Products could be highly differentiated branding or homogenous 9. Nonprice competition

Market Structure: Oligopoly

Examples of oligopolistic structures:

Supermarkets Banking industry Chemicals Oil Medicinal drugs Broadcasting Airlines

Market Structure: Duopoly

Industry dominated by two large firms Possibility of price leader emerging rival will follow price leaders pricing decisions High barriers to entry Abnormal profits likely

Market Structure: Monopoly

It is a market situation in which there is only one seller of a product with barriers to entry of others. Monopoly is the form of market organisation in which there is a single seller selling a commodity for which there are no close substitutes. Salvatore Pure monopoly industry is the firm Actual monopoly where firm has >25% market share. Monopolist is a price maker. Natural Monopoly high fixed costs gas, electricity, water, telecommunications, rail.

Market Structure: Monopoly

Characteristics One producer and no difference between firm & industry. High barriers to entry Firm controls price OR output/supply Abnormal profits in long run Possibility of price discrimination Consumer choice limited There is no close substitutes Monopoly firm is a price makers. Monopolys demand curve slopes downward from left to right.