MARKET STRUCTURE:

One important factor in the firms’ environment is competition, the amount and nature

of which is likely to be related to the number of other firms in a market, which can be

divided into broad categories of ‘market structures’. It may seem silly to investigate

the implications of the market structure called monopoly where there is no

competition and no substitutes, which is more than unlikely – it is impossible.

However, although in reality most of the markets in the world will fall somewhere

between these two extremes, they are worth considering as benchmarks. Looking at

the extremes will reveal how the behaviour of firms is affected by the amount of

competition at all points in between, in the same way that all the shades of gray on a

black and white TV can be explained by the amounts of the two extremes (black and

white) that are present. (Andre Clark, “Organisations Competition and the Business

Environment”, 2000, Prentice Hall, UK, pg. 100-101)

PERFECT COMPETITION:

At the other end of the market structure continuum to monopoly is perfect

competition. Whereas monopoly represents a situation f total concentration of supply,

perfect competition is a situation where both the supply and demand sides have zero

concentration. If follows that if there is no concentration of supply, there must be a

very large number of suppliers such that no single supplier has the ability to influence

the market price. In its ‘pure’ form, perfect competition has several distinguishing

characteristics:

 A very large number of sellers, each of which occupies a tiny or insignificant

market share.

 A very large number of buyers.

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  A product which is incapable of being differentiated and where all sellers sell

an identical product.

 All buyers have identical cost structures – they all pay the same for materials,

rent and labour.

 No single buyer or seller is of sufficient size to influence price.

 There are no innovations or ‘secrets’ which may give one buyer or seller an

advantage over another.

 There are no entry or exit barriers associated with competing in the market.

Like monopoly, ‘true’ perfect competition is virtually unknown in practice – it

represents the extreme at which there is no concentration of supply or demand at all.

Some markets, however, exhibit very low supply and demand concentrations and so

approximate to perfect competition. Example includes the market for fruit and

vegetables in a large town or city Market Square or the market for bed and breakfast

accommodation in a large city. Because of the features of perfect competition, the

market price for any given product is arrived at purely through the economic forces of

supply and demand. Because no buyer or seller is big enough to set the price, each

supplier must take the market price – they are said to be price takers. This tends to

lead to medium or low profits for the supplier and relative price stability for the buyer.

(David J. Campbell, “Organisations and the Business Environment”, 1997,

Butterworth-Heinemann, Oxford, p. 285-286)

MONOPOLY:

Monopoly lies at the opposite end of the spectrum of competition. In its purest form a

monopolistic market is one in which there is no competition at all; there is a single

producer supplying the whole market. The monopolist has considerable market

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power and can determine price or quantity sold, but not both because he or she cannot

control demand. The power of the monopolist depends on the availability of

substitutes, and on the existence and height of barriers to entry. If there are no close

substitutes for the good being produced, or if there are high barriers to entry, the

power of the monopolist will be high and abnormal profits can be earned in the long

run. A monopolist could also be a group of producers acting together to control

supply to the market: for example, a cartel such as OPEC (Organization of Petroleum

Exporting Countries).

In monopolistic markets the producer might be able to charge different prices for the

same good: for example, on an aeroplane it is quite likely that there will be

passengers sitting in the same class of seat having paid very different prices,

depending upon where the tickers were bought. Essentially they are paying different

prices for the same service, and the producer is said to be exercising price

discrimination. Why is this possible? There are certain conditions that must hold for

this type of price discrimination to occur. First, the market must be monopolistic and

the producer must be able to control supply. Second, there must be groups of

consumers with different demand conditions. For example, the demand for train

travel by the commuter who works in London will be more inelastic than the demand

of a student going to London for the day, who could use alternative forms of transport

or even not go. This means that the willingness to pay separate these groups in some

way. For example, British Telecom is able to separate its markets by time so that it is

cheaper to phone after six p.m.; British Rail separates groups by age for certain of its

rail cards. (Ian Worthington & Chris Britton, “The Business Environment”, 1997,

Second Edition, London, p. 322)

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OLIGOPOLY:

Oligopoly is Greek for ‘few sellers’, so in this case we are looking at markets

dominated by a few big players. Industries that are classed as oligopolies include the

toiletries, soap powder, chemicals, brewing, retailing and newspaper industries, in

which a few firms do most, but not all, of the business. Why each of these is

dominated in this way depends on the specifics of the industry, but there is a general

tendency over time for markets to become dominated by fewer and fewer firms since

this increases the profits of those that remain. It can be achieved simply by being

better than rivals, but more usually it involves either the merging of firms or the

buying of rivals in a take-over. In some cases, it occurs when a firm invents a new

product or devises a new line of business that others cannot imitate, either because it

is hard to do, or because the original firm has a patent or copyright on it. (Andre

Clark, “Organisations Competition and the Business Environment”, 2000, Prentice

Hall, UK, p. 111)

The most often quoted examples of oligopoly are the market for tobacco and the

market for soap powder. Both of these markets are dominated by a very small

number of producers and both exhibit the predicted characteristics. There is little

price competition and price is fairly uniform in both markets. (Ian Worthington &

Chris Britton, “The Business Environment”, 1997, Second Edition, London, p. 325)

MONOPOLISTIC COMPETITION:

Monopolistic competition is said to exist when products have a monopolistic market

share in a relatively small part of the market, i.e. a small segment of the total market.

When many products each occupy their own ‘little monopoly’, then they do not

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directly compete with each other even though the products may be very similar. A

typical way of achieving a situation of monopolistic competition is product

differentiation. Thus the practice of making the product unique to enable it to be

more acceptable to a specific segment or niche in the market. A highly differentiated

product which has a high market share in a relatively small market segment enjoys the

possibility of commanding a premium (‘price setting’) price – the same characteristic

as a monopolist.

One of the most important mechanisms of achieving differentiation is by product

branding. By aggressively promoting a brand, producers of consumer good attempt to

built loyalty to the brand to the exclusion of others. By engendering a brand with

unique product qualities (e.g. superior washing power, unique taste or texture),

customers remain loyal and this does not switch to other brands which offer different

product benefits. Key technological innovations can also serve the purpose (such as a

objective is to separate its products to such an extent that the customer has just the one

effective choice of product within the sector. The idea of removing customer choice

within the sector is key to monopolistic competition. If a company can develop a

product to such an extent that customers automatically think of their product, then

they have succeeded in this regard. (David J. Campbell, “Organisations and the

Business Environment”, 1997, Butterworth-Heinemann, Oxford, p. 282-283)

A COMPARISON OF PERFECT COMPETITION AND MONOPOLY:

 It would be expected that price would be higher under monopoly than under

perfect competition because of the absence of competition in the monopolistic

market. It is argues, for example, that the large telephone companies

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 (including BT) are overcharging the consumer. The benefits of the

considerable technological advances that have been made in this area have not

been passed on fully to the consumer. This can only be sustained by virtue of

the monopolistic power of the companies. But, to counter this it could be

argued that a monopolist is in a better position to reap the benefits of

economies of scale, therefore it is possible that price might be lower.

 There might be less choice under monopoly since firms do not have to

continually update their products in order to stay in business. But, it is also

possible to think of examples where monopolies provide great choice (e.g. in

the case of radio stations), where under perfect competition all radio stations

would cater for the biggest market which would be pop music. A monopolist,

however, would be able to cover all tastes with a variety of stations.

 There is less incentive to innovate under monopoly, since they are subject to

less competition. But, equally, a monopolist might have more incentive to

innovate as they can reap the benefits in terms of higher profits. They many

also have more resources to devote to innovation. (Ian Worthington & Chris

Britton, “The Business Environment”, 1997, Second Edition, London, p. 323)

CONCLUSION:

The topic discussed in this assignment is about the Market Structure, which is very

important for a company and a business to know well before starting or after staring

to progress and improve the business. I have discussed about the market structure and

given brief ideas about the different types of market structures, their functions and the

way it operates. I have also learnt a lot while doing this assignment, which would

help me a lot when I plan to do business of my own.

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REFERENCES:

 Andre Clark, “Organisations Competition and the Business Environment”,

2000, Prentice Hall, UK.

 David J. Campbell, “Organisations and the Business Environment”, 1997,

Butterworth-Heinemann, Oxford.

 Ian Worthington & Chris Britton, “The Business Environment”, 1997, Second

Edition, London.