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Market Structures

There are two main types of market structures - perfect competition and imperfect competition. Perfect competition has many small firms, easy entry/exit, standardized products and firms are price takers. Imperfect structures include monopoly, oligopoly and monopolistic competition. A monopoly has a single seller, barriers to entry and is a price maker. Oligopoly has a small number of interdependent firms. Monopolistic competition involves product differentiation among many firms.

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82 views

Market Structures

There are two main types of market structures - perfect competition and imperfect competition. Perfect competition has many small firms, easy entry/exit, standardized products and firms are price takers. Imperfect structures include monopoly, oligopoly and monopolistic competition. A monopoly has a single seller, barriers to entry and is a price maker. Oligopoly has a small number of interdependent firms. Monopolistic competition involves product differentiation among many firms.

Uploaded by

Keen Djn
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Basic Economics, Agrarian Reform and

Taxation
MARKET STRUCTURES

John Patrick Pujanes Habacon


Market Structure
 Basically, when we hear the word market, we think of a
place where goods are being bought and sold.

 In economics, market is a place where buyers and


sellers are exchanging goods and services with the
following considerations such as:

• Types of goods and services being traded


• The number and size of buyers and sellers in the market
Two Types of Market Structure

 Perfect or Pure Market


 Imperfect Market
Perfect Market
Perfect Market
- is a market situation which consists of a very
large number of buyers and sellers offering a
homogeneous product.
- Under such condition, no firm can affect the
market price.
- Price is determined through the market demand
and supply of the particular product, since no
single buyer or seller has any control over the
price.
Perfect Competition
- cannot be found in the real world. For such to exist, the
following conditions must be observed and required:

 A large number of sellers


 Selling a homogenous product
 No artificial restrictions placed upon price or quantity
 Easy entry and exit
 All buyers and sellers have perfect knowledge of market
conditions and of any changes that occur in the market
 Firms are “price takers”
Imperfect Market
In economic theory, imperfect competition is a
type of market structure showing some but not
all features of competitive markets.

Forms of imperfect competition include:


 Monopoly
 Oligopoly
 Monopolistic competition
 Monopsony
 Oligopsony
Monopoly
 comes from a Greek word ‘monos’ which means
‘one’ and ‘polein’ means to ‘sell’
 There is only one seller of goods or services

A monopoly should be distinguished from a cartel.

(Cartel refers to a market situation in which firms


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

 This is a market structure in which there is just


one firm, and entry by other firms is not possible.
 Because there is only one firm, consumers have
only one place to buy the good. There are no
close substitutes.
 The firm does have the power to set the price, but
still sets an optimal price to maximize profit. If the
monopolist sets the price too high, revenue will
decline. Nonetheless, the firm is a price maker.
Classifications of Monopoly

Natural Monopoly
 is a market situation where is a single firm can supply
the entire market due to the fundamental cost
structure of the industry.
Legal Monopoly
 is 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.
Why Do Monopolies Exist?

 Control of a scarce resource or


input
 Increasing returns to scale
 Technological superiority
 Network externality
 Government-created barrier
Monopolistic Competition

 Market situation in which there are enough sellers


or producers and that each acts independently of
the others, but are few enough that each tends to
have a “monopoly” of its own specific target
market segments
 The theory of monopolistic competition is applied
Monopolistic Competition

 Differentiated products– those


that tend to be similar of nature
and purpose, but are used
differently and are generally
preferred by specific groups of
consumers
Characteristics of Monopolistic Competition

 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 products or similar but not
identical products.
 New firms can enter the market easily. However,
there is a greater competition in the sense that new
firms have to offer better features of their products.
 Economic rivalry centers not only upon price but also
upon product variation and product promotion.
Oligopoly
 comes from the Greek word “oligo” which means
‘few’ and “polein” means ‘to sell’.
 small number of sellers, each aware of the action of
others
 All decisions depend on how the firms behave in
relation to each other
 In oligopoly, conjectural interdependence is
present, that is, the decision of one firm influences
and are influenced by the decision of other firms in
the market.
Characteristics of an Oligopoly

 There are 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
competitors to enter the market.
Types of Organization of Oligopoly

Cartel is a formal agreement among oligopolists to


set-up a monopoly price, allocate output, and share
profit among members.

Collusion is a formal or an informal agreement


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

A market situation in which there is only


one buyer of goods and services in the
market. It is sometimes considered
analogous to monopoly in which there is
only one seller of goods and services in the
market.

Monopsony power gives them the ability


to control their unit cost for an input
which is similar to the way the monopoly
controls their price.
Oligopsony
A market situation where there are
a small number of buyers. This is
usually with a small number of
firms competing to obtain the
factors of production.

Usually, there exists a mutually


beneficial relationship between
oligopolists and oligopsoists. This
means that there are very few
sellers of a product specifically
being made for very few buyers of
the same product
Summary of Market Structures

Characteristics Behavior
Market Number of Entry Product Type Price Strategy Promotion
Structure Firms Condition Strategy
Perfect Very Many Easy Standardized Price taker None
Competition
Monopoly One None Only one Price maker Little
product
Monopolistic Many Easy Differentiated Price maker Large
Competition amount
Oligopoly Few Impeded Standardized Interdependent Little or
or Large
Differentiated Amount

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