Chapter 8

MARKET
STRUCTURE
ADORNA, CARLZDEL L. LAMBERTE, CAMILLE C. SANEZ, HERILOU
P.

WHAT IS

MARKET?

MARKET A place where buyers and seller are

exchanging goods and services

MARKET A place where buyers and seller are

exchanging goods and services

WITH THE FOLLOWING CONSIDERATIONS:

MARKET A place where buyers and seller are

exchanging goods and services
WITH THE FOLLOWING CONSIDERATIONS:
Types of goods and services being traded;

MARKET A place where buyers and seller are

exchanging goods and services
WITH THE FOLLOWING CONSIDERATIONS:
1.

Types of goods and services being traded;

The number and size of buyers and sellers in the

market

MARKET A place where buyers and seller are

exchanging goods and services
WITH THE FOLLOWING CONSIDERATIONS:
1.

Types of goods and services being traded;

2.

The number and size of buyers and sellers in the

market; and
The degree to which information can flow freely.

2 TYPES OF MARKET STRUCTURE

1.

PERFECT OR PURE MARKET

2.

IMPERFECT MARKET

WHAT IS

PERFECT
MARKET?

PERFECT MARKET

A market situation which consist of a LARGE NUMBER OF

BUYERS AND SELLERS OFFERING A HOMOGENEOUS
PRODUCT.

PERFECT MARKET

A market situation which consist of a LARGE NUMBER OF

BUYERS AND SELLERS OFFERING A HOMOGENEOUS
PRODUCT.

No firm can affect the market price.

PERFECT MARKET

A market situation which consist of a LARGE NUMBER OF

BUYERS AND SELLERS OFFERING A HOMOGENEOUS
PRODUCT.

No firm can affect the market price.

PRICE is determined through market

demand and supply of the particular
product.

PERFECT MARKET

PERFECT COMPETITION

PERFECT MARKET

PERFECT COMPETITION
built on

CRITICAL ASSUMPTIONS:

PERFECT MARKET

PERFECT COMPETITION
built on

CRITICAL ASSUMPTIONS:

THE BEHAVIOR OF AN INDIVIDUAL FIRM

THE NATURE OF THE INDUSTRY IN WHICH IT OPERATES

PERFECT MARKET

PERFECT COMPETITION
built on

CRITICAL ASSUMPTIONS:

THE BEHAVIOR OF AN INDIVIDUAL FIRM

Firm

is assumed to be a price taker

THE NATURE OF THE INDUSTRY IN WHICH IT

OPERATES
The

firm operating has no power to influence

through its own individual action

It

must passively accept

happens to be prevailing

whatever

price

PERFECT MARKET

PERFECT COMPETITION
built on

CRITICAL ASSUMPTIONS:

THE BEHAVIOR OF AN INDIVIDUAL FIRM

THE NATURE OF THE INDUSTRY IN WHICH IT OPERATES

Industry is characterized by

FREEDOM OF ENTRY AN

EXIT;

Free to set up production

Free to cease production and leave the industry

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change my
price.

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CHARACTERISTICS OF

PERFECT MARKET

CHARACTERISTICS OF PERFECT
MARKET
A
LARGE NUMBER OF SELLERS,

EACH ACTING
INDEPENDENTLY AND NOT COLLIDING WITH ANY OTHER.

- SELLING A HOMOGENEOUS PRODUCT.

NO ARTIFICIAL RESTRICTIONS PLACED UPON PRICE OR

QUANTITY.

- EASY ENTRY AND EXIT.

ALL BUYERS AND SELLERS HAVE PERFECT KNOWLEDGE OF

MARKET CONDITIONS AND ANY CHANGES THAT OCCUR IN
THE MARKET.

- FIRMS ARE PRICE TAKERS.

EXAMPLES OF

PERFECT MARKET

EXAMPLES OF PERFECT MARKET

AGRICULTURAL MARKETS

INTERNET RELATED INDUSTRIES

SHORT-RUN ANALYSIS OF LONG-RUN ANALYSIS OF

PERFECT COMPETITION PERFECT COMPETITION

WHAT IS

IMPERFECT
MARKET?

IMPERFECT MARKET

There are FEW SELLERS which are enough to affect the market
price.

Only happens when the FIRM BECOMES RELATIVELY LARGER IN

CONNECTION WITH MARKET SIZE.

The power of the individual FIRM HAS TO DETERMINE PRICES BY

ADJUSTING ITS SALES, WITHOUT HAVING A COMPLETE POWER OF
A MONOPOLIST. Essential and distinguishing feature

FORMS OF IMPERFECT MARKET

MONOPOLY

Greek words: MONOS ONE; POLIEN TO SELL

Only one seller or producer of goods and services.

There is a lack of economic competition and viable substitute

for the goods and services that they provide.

Can influence and has considerable control over the price

(PRICE MAKER).

CARTEL a market situation in which firm agree to cooperate

with one another to behave as if they were a single firm and
thus eliminate competitive behavior among them.

MONOPOLY

THE FOLLOWING ARE SOURCES OF MONOPOLY:

There is only ONE PRODUCER OR SELLER of goods and only one

provider of services in the market.

New firms find EXTREME DIFFICULTY IN ENTERING the market. The

existing monopolist is considered giant in its field or industry.

There is NO AVAILABLE SUBSTITUTE so that a product or service is

considered unique.

It CONTROLS THE TOTAL SUPPLY OF RAW MATERIALS in the industry and

has CONTROL OVER PRICE.

It OWNS A PATENT OR COPYRIGHT.

Its operations are UNDER ECONOMICS OF SCALE.

MONOPOLY

CLASSIFICATIONS OF MONOPOLY

NATURAL MONOPOLY a market situation where a single firm can

supply the entire market due to the fundamental cost structure of the
industry

LEGAL MONOPOLY sometimes called as de jure monopoly - a form

of monopoly which the government grants to a private individual or
firm over the product or services.

COERCIVE MONOPOLY a form of monopoly whose existence as the

sole producer and distributor of goods and service is by means of
coercion (legal or illegal).

SHORT-RUN ANALYSIS OF
MONOPOLY

LONG-RUN ANALYSIS OF
MONOPOLY

OLIGOPOLY

Greek words: OLIGO FEW; POLIEN TO SELL

A market situation in which there is a SMALL NUMBER OF

SELLERS.

All decisions depend on how the FIRMS BEHAVE IN RELATION

TO EACH OTHER.

CONJECTURAL INTERDEPENDENCE is present; the decision of

one firm influences and are influenced by the decision of
other firms in the market.

OLIGOPOLY
CHARACTERISTICS:
There

is a SMALL NUMBER OF FIRMs in the market selling

differentiated or identical products.

The

firm has CONTROL OVER PRICE because of the small

number of firms providing the entire supply of a certain
product.

There

is an EXTREME DIFFICULTY FOR NEW COMPETITION

to enter the market.

OLIGOPOLY
Oligopolies

are often distinguished based on the

PRODUCTS THEY SELL IN THE MARKET.
TYPES

OF OLIGOPOLY

PURE

OLIGOPOLY the products sold are fairly homogeneous.

DIFFERENTIATED

OLIGOPOLY few sellers of differentiated products;

value characteristics or qualities of good vary.

DUOPOLY

give rise to a situation where only two producers exist in

a given market.

OLIGOPOLY
TYPES

OF ORGANIZATION OF OLIGOPOLY

CARTEL

A formal agreement among oligopolists to set up

a monopoly price, allocate, and share profit among
members.
Example: Organization of Petroleum Exporting Countries (OPEC)

COLLUSION

A formal or an informal agreement among

oligopolists to adopt policies that will restrict or reduce the
level of competition in the market.

OLIGOPOLY
KINKED

DEMAND CURVE the demand curve of the

individual firm in oligopolistic market.

KINK

in the demand curve at the price is caused by

the expectations of the firn on the actions that its
competitors may take if the firm will change its price.

MONOPOLISTIC COMPETITION

A market situation in which there are MANY SELLERS

PRODUCING HIGHLY DIFFERENTIATED PRODUCTS.

There is competition because many sellers offer products that

are CLOSE, BUT NOT PERFECT, SUBSTITUTE FOR EACH
OTHER.

Similar characteristics with PERFECT COMPETITION but in

addition to PRODUCT DIFFERENTIATION.

PRODUCT DIFFERENTIATION creates some degree of market

power to monopolistic competitors

MONOPOLISTIC COMPETITION

ESSENTIAL CHARACTERISTICS OF MONOPOLISTIC COMPETITION

ARE:

A large number of buyers and sellers in a given market ACT

INDEPENDENTLY.

There is a LIMITED CONTROL OF PRICE because of product differentiation.

Sellers offer DIFFERENTIATED OR SIMILAR PRODUCTS but not identical

products.

NEW FIRMS CAN ENTER THE MARKET EASILY. However, there is a greater
competition sense that new firms have to offer better features of their
products.

Competition in the market focuses not only on price but also on

PRODUCT VARIATION AND PROMOTION.

SHORT-RUN ANALYSIS OF
MONOPOLISTIC COMPETITION

LONG-RUN ANALYSIS OF
MONOPOLISTIC COMPETITION

MONOPSONY

A market situation where there is ONLY ONE BUYER OF

GOODS AND SERVICES in the market.

It is sometimes considered ANALOGOUS TO MONOPOLY.

The market has the CONTROL OF SUPPLY and it can REDUCE

THE NUMBER OF INPUT DEMANDED.

It gives the firm the ability to control its UNIT COST FOR AN
INPUT which is similar to the way the monopoly controls its
price.

OLIGOPSONY

A market situation where there is a SMALL NUMBER OF

BUYERS.

Usually with a SMALL NUMBER OF FIRMS COMPETING to

obtain the FACTORS OF PRODUCTION.

FIRMS ARE BUYERS not sellers.

This is sometimes ANALOGOUS TO OLIGOPOLY.

SUMMARY
MARKET
CHARACTERIST
ICS

PERFECT
COMPETITI
ON

MONOPOLIST
IC
COMPETITIO
N

OLIGOPOLY

MONOPOLY

Product
differentiation
(brand name)

No

Yes

Only slight when the

oligopolist supplies
raw materials

Yes

Price
Competition

Intense:
must meet
price of
other firms

Intense

Occasional but
cooperative behavior
often present

Occasional with
producers of
substitute goods
and services; price
of natural
monopolies subject
to regulation

Non-price
competition
(advertising

No

High

High

Often, to promote
public goodwill

Barriers to Entry

No

Low

High

High

SUMMARY
MARKET
CHARACTERIST
ICS

PERFECT
COMPETITI
ON

MONOPOLIST
IC
COMPETITIO
N

OLIGOPOLY

MONOPOLY

Information Cost

No

Low

High

High

Opportunities to
earn and keep
economic profits

No

Few

Many

Many, though often

regulated

Number of
sellers

Large
number of
sellers

Numerous
buyers and
sellers

Small number of
firms

Only one seller

Degree of control Price taker

over price

Limited control Has control over price Price maker

Type of Product

Differentiated
products or
similar but not
identical

Homogenou
s product

Differentiated or
identical products

Highly
standardized