Market structure

From CEOpedia | Management online

The market structure consists in the way that different industries are classified and distinguished based on their degree and nature of competition for products and services (Cubbin 2013, p.10). The market structure may be categorized by paying attention to the competition levels and the nature of these markets. The classification of markets consists of four types:

Types of Market Structure

Market structure describes, according to economic theory, how businesses are distinguished and categorized by the types of products they can sell and how them can influence the operations that they are making (Tudela 2010, p.76). A market structure helps to understand what are the factors that are differentiating the different markets. Market structure, in economics, is represented by the number of companies producing the same products that are homogeneous between them. The types of market structures consist in:

  1. Monopolistic completion, also known as competitive market: there is a large number of companies included in this group, each of them owning a small part of the market shares and producing slightly different products.
  2. Oligopoly Market: the market is composed of a small number of companies that together are controlling the majority of the market share.
  3. Duopoly Market: it’s a special case of an oligopoly market composed of 2 firms.
  4. Monopnosy Market: where there is only one buyer present in the market.
  5. Oligopnosy Market: it’s a market in which many sellers can be present but with only few buyers that can purchase their products.
  6. Monopoly Market: where there is only one firm that provides a product or a service.
  7. Natural monopoly market: in this kind of market the firm is considered a natural monopoly if it’s able to cover the entire market demand at a lower cost than any combination of more specialized companies could do. It’s a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm.
  8. Perfect competition Market: the characteristic of this market structure consists of no barriers to entry, an unlimited number of producers and consumers, a perfect and elastic demand curve.

Imperfectly competitive structure is almost the same as the realistic market conditions where few monopolistic competitors, monopolists, oligopolists and duopolists exist and control all the market conditions. The elements of a Market Structure consist of the number and the size distribution of firms, the conditions to entry, and the degree of differentiation. These abstract worries tend to define not all the details of a real and concrete market system where buyers and sellers actually meet to make possible a real trade. The competition is very useful because it shows the real customer demand and induces the sellers (operators) to provide an always better service quality level that buyers require, taking into account the costs to be covered that the seller needs to consider. Competition cause, in other words, the seller reveals some private pieces of information and the real costs because it aligns the seller's interests with the buyers' interests. When there is no perfect competition, there can be used three different approaches to deal with problems connected to the control of the market and the relationship between the government and the operator:

  • Put under continuous pressure the operator.
  • Search information related to the operator and the market.
  • Creating and applying the incentive regulation.

Characteristics of a Monopolistic Market

Monopolistically competitive Markets are following some common characteristics such as:

  • No business has total control of the market and there is the presence of many producers and customers.
  • There are barriers to entry and exit from the market.
  • The consumers can’t see almost any difference in the competitor's product prices.
  • The producers have a kind of control over the prices.

The characteristics of a monopolistically competitive market are almost similar to the perfectly competitive market. These markets differ because monopolistic competition provides heterogeneous products and involves a great deal of non-price competition, thanks to the product’s differentiation (Baldwin, Scott 2014, p.43). An establishment making gains in the short run will nevertheless only break indeed in the long run because demand will drop and average total cost will increase. This means in the long run, a monopolistically competitive establishment will make zero profitable profit. This illustrates the quantum of influence the establishment has over the request. Because of brand fidelity, it can raise its prices without losing all of its guests. This means that an individual establishment's demand wind is overleaning, in discrepancy to perfect competition, which has an impeccably elastic demand schedule.

Oligopoly Characteristics

The characteristics of an oligopoly market are:

  • Where marginal revenue is equal to marginal costs an oligopoly maximizes profits by producing.
  • Oligopolies have the ability to set prices. They are price setters rather than price takers.
  • Entry and exit barriers are very high. There are barriers such as economies of scale, access to expensive and complex technology, patents, etc.
  • There are just few firms operating in the market. This means that the actions of one firm can influence the actions of others.
  • There is product differentiation and the product may be homogeneous or differentiated.
  • Oligopolies can retain long-run abnormal profits.
  • Oligopolies have perfect knowledge about their costs and demand but their intern information may be incomplete. Buyers have only imperfect knowledge of the price, cost and product quality.
  • Oligopolies tend to compete on terms other than price (for example using advertisement, product differentiation, etc.)
  • The distinctive characteristic of an oligopoly is interdependence. Oligopolies are composed of a few large companies. Each company is big enough that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond in an opportune way. This means that a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves.

Perfectly Competitive Market Characteristics

The characteristics of a perfectly competitive market are:

  • There is an infinite number of consumers that have the ability to buy the product at a certain price and an infinite number of producers that can supply the product at a certain price.
  • There are no barriers to entry and to exit.
  • All consumers and producers have a perfect knowledge of price, quality, production and utility.
  • There are no transactions costs.
  • Companies produce homogeneous products.
  • Companies tend to maximize the profits.
  • There will always be a sufficient number of companies in the industry thanks to the lack of increasing returns to scale.


Market structure — recommended articles
Competition — Price-Taker — Price Maker — Free competition — Price taker — Mobility barriers — Selective distribution — Short run equilibrium — Factors affecting pricing

References

Author: Nicholas Acquaviva

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