Republic of the Philippines

University of Antique
College of Business and Accountancy
Sibalom, Antique

Topic: Market Structure and Imperfect Competition Subject: Economics 2

Reporters: Alagos, Ronald Instructor: Cherryville S. Mejares
Geamal, Anedaine
Mission, Margarette Chimes
Valdevieso, Angela Karylle

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Learning Objectives:
• to learn what is a market structure and how it relates to economics
• to learn, understand, and differentiate the different market structures
• identify the different market structures locally
• be able to apply knowledge to real-life situations

Introduction
Economics is the study of decision-making behaviour of individuals in terms of
distribution and allocation of scarce resources.
To help us further understand these behaviours, we will take a look into the different
market structures which may be present in an economy.
Market structures are ways of supplying, allocating and distributing goods/services
in a market, which dictate the behaviour of individuals or consumers (micro) and the
economy (macro).

PERFECT COMPETITION
Perfect competition or pure competition is a market structure where many firms
produce identical products, and no single firm has significant market power. This leads to
perfect information, easy entry and exit, and homogeneous products.

CHARACTERISTICS
• The products of firms in the industry under consideration are standardized.
This means that they are identical or at least so much alike that buyers do not mind
buying from any firm. Buyers, however, will not buy from a firm whose price is
higher than the rival firms.
• The buyer and the seller are without power to change the going market price of
the product. The purchases made by the individual buyer constitute only a very
small fraction of the total purchases made by all buyers. Therefore, the buyers
cannot ask for a reduced price from the seller because of the existence of many other
alternative buyers. In the same manner, any individual seller cannot effect changes
in the market price because of the very limited quantity of products he holds.
• Easy Entry and Exit. The absence of restraints of any kind is an important feature.
In a purely competitive market, no artificial obstacles bar the entry and exit of firms.
Examples of obstacles are permits and licenses required by the government, as well
as price ceilings imposed on commodities.
• Buyers, sellers and resource owners have a perfect knowledge of market
conditions. Business firms have knowledge of their revenues and cost functions.
They are also aware of the prices of all resource inputs and of the various
technologies available for producing their outputs. Buyers possess information on
the prices charged by all firms. Resource owners know the prices of inputs bought
by all firms.

ADVANTAGES AND DISADVANTAGES

Advantages of Perfect Competition for Consumers
• Lower prices
• Increased product variety
• Improved quality
• Efficient allocation of resources
• Consumer sovereignty
 Republic of the Philippines
University of Antique
College of Business and Accountancy
Sibalom, Antique
Advantages of Perfect Competition for Producers
• Lower costs and increased efficiency
• Access to a larger customer base
• Increased innovation and product development
• Fair and equal opportunities
Disadvantages of Perfect Competition for Consumers
• Limited product differentiation
• Lack of innovation
• Inefficient allocation of resources
• Lack of consumer protection
Disadvantages of Perfect Competition for Producers
• Price competition
• Limited pricing power
• High advertising and marketing costs
• Limited product differentiation
• Barriers to entry and exit

WHEN IS THE PERFECT COMPETITION MARKET STRUCTURE USED?

Perfect competition occurs when there are many sellers, there is easy entry and
exiting of firms, products are identical from one seller to another, and sellers are price
takers.

EXAMPLES OF INDUSTRIES WHERE A PERFECT COMPETITION MARKET STRUCTURE

IS OBSERVED
An agricultural market (Farmers market) made up of thousands of farmers comprises
perfect competition that makes the market efficient. The average farmers’ market is
perhaps the closest real-life example to perfect competition. Small producers sell nearly
identical products for very similar prices. The entry and exit of some vendors does not
change the overall marketplace, and the prices and product information is clear and fairly
uniform.
Bakery Market. Basic bread loaves across different bakeries are nearly identical in
recipe, packaging, and pricing, making the brand name the only difference. Consumers can
buy basic bread from various shops and receive an almost identical product.
Supermarkets. The situation may be relatively similar in the case of two competing
supermarkets that stock their aisles from the same set of companies. Again, there's little
to distinguish products from one another between both supermarkets and their pricing
remains almost the same.

MONOPOLISTIC COMPETITION
Monopolistic competition is a type of imperfect competition where many producers
sell products that are differentiated from each other but serve a similar purpose.

CHARACTERISTICS
• Many Sellers. There are numerous firms in the market, each with a relatively small
market share.
• Product Differentiation. Firms sell products that are slightly different from their
competitors, which may vary by branding, quality, features, etc.
• Low Barriers to Entry and Exit. Firms can enter or exit the market relatively easily,
which keeps competition high.
• Non-Price Competition. Firms often compete based on factors other than price,
such as product quality, brand image, or customer service.
• Some Market Power. Firms have some control over the price because of product
differentiation but not enough to set prices far above the market rate.

ADVANTAGES AND DISADVANTAGES

Advantages
• Variety for Consumers
• Innovation
• Incentive to Maintain Quality
 Republic of the Philippines
University of Antique
College of Business and Accountancy
Sibalom, Antique
Disadvantages
• Higher Costs
• Excess Capacity
• Wasteful Spending on Advertising

ADVERTISEMENT
Advertising in monopolistic competition is primarily used to differentiate a firm’s
products and create brand loyalty. Firms employ persuasive advertising, often focusing on
unique features or emotional appeals rather than price. It can help firms maintain a
competitive edge by building a strong brand image. Heavy advertising may add to production
costs, which may translate into higher prices for consumers.

ARGUMENTS ON ADVERTISEMENT
Arguments for Advertisements
• advertising is informative;
• advertising increases sales and permits economies of scale;
• advertising increases sales and contributes to economic growth;
• advertising supports the media; and
• advertising increases competition and lowers prices.
Arguments against Advertisements
• advertising is not informative but competitive;
• the economies of scale are illusory;
• advertising raises the cost curve;
• advertisers may use their influence to bias the media;
• advertising is used as an entry barrier, and
• advertising is not a productive activity.

ROLE OF ADVERTISEMENT IN DIFFERENT MARKET STRUCTURES

Perfect Competition: Minimal, since products are identical, and firms compete primarily
on price.
Monopolistic Competition: High, as firms rely on ads to differentiate their products.
Oligopoly: Significant, as firms use ads to build brand loyalty and reduce the effects of
competitors.
Monopoly: Limited, since there’s no direct competition. Ads focus on maintaining a good
public image.

WHO, WHAT, AND WHERE IS A MONOPOLISTIC COMPETITION STRUCTURE

USED/OBSERVED?
Who: Monopolistic competition is observed among many small to medium-sized firms.
What: It is common in markets where companies sell similar, but not identical, products.
Where: Observed in urban and developed regions with diverse customer preferences and
easy market entry conditions.

EXAMPLES OF INDUSTRIES WHERE A MONOPOLISTIC COMPETITION MARKET

STRUCTURE IS OBSERVED
Restaurants: Differentiated by menu, ambiance, location, and brand.
Retail Clothing: Different brands offer unique styles, quality, and brand images.
Consumer Electronics: Firms provide various features, brands, and services.
Cosmetics: Companies differentiate products based on ingredients, branding, and product
promises.

MONOPOLY
Monopoly refers to a market situation where there is only one seller or producer
supplying unique goods and services (Pindyck & Daniel 2001). It is a single seller that has
a complete control over a specific industry. Thus, there is nobody else selling anything like
what the monopolist is producing Thus, there are no close substitutes. Monopoly comes
from the Greek word "mono" which means one and “polise" which means seller (Samuelson
& Nordhaus, 2005).
Under monopoly market, sellers are mostly firms offering water or electricity products
and services, or other public utilities. Monopolies are considered extinct or rare nowadays,
some of them exist because of some governmental regulation and protection, but even then,
 Republic of the Philippines
University of Antique
College of Business and Accountancy
Sibalom, Antique
monopolists should always look over their shoulders for potential entry of competitor in the
industry (Samuelson & Nordhaus, 2005).

CHARACTERISTICS
• Single Seller or Producer. A monopoly market is comprised of a single supplier
selling to a multitude of small, independently acting buyers. In other words, a
monopoly means a single firm is the industry.
• Unique Product. A unique product means that there are no close substitutes for the
monopolist's product. As such, the monopolist faces little or no competition.
• Impossible Entry. Barriers to entry are so severe in a monopoly that it is impossible
for new firms to enter the market. In other words, extremely high barriers make it
very difficult or impossible for new firms to enter an industry. Barriers to entry
include (1) sole ownership of a vital resource, (2) legal barriers like government
franchises and licenses, and (3) economies of scale.
• Other Characteristics of Monopoly Market. The monopolist definitely makes the
price for the products or services. In other words, it is the monopolist who dictates
the price of commodities because the products or services offered are unique and
have no close substitute in the market. There is no need for the monopolist to
promote the product, since it is the only one selling it and offering it to the public.

ADVANTAGES AND DISADVANTAGES

Advantages
• No price wars
• Large scale economies
• Research and development
Disadvantages
• Substandard quality products and services
• Higher and unpredictable prices
• Price discrimination

ADDITIONAL INFORMATION ON THE MONOPOLY MARKET STRUCTURE

A natural monopoly exists when there is great scope for economies of scale to be
exploited over a very large range of output. Indeed, the scale of production that achieves
productive efficiency may be a high percentage of the total market demand for the product
in the industry. A natural monopoly therefore is a situation where economies of scale are so
significant that costs are only minimized when the entire output of an industry is supplied
by a single producer, so that supply costs are lower under monopoly than under conditions
of perfect competition and oligopoly.

EXAMPLES OF INDUSTRY WHERE MONOPOLY IS OBSERVED OR PRACTICED

Natural gas, electricity companies, and other utility companies are examples of
natural monopolies. They exist as monopolies because the cost to enter the industry is high
and new entrants are unable to provide the same services at lower prices and in quantities
comparable to the existing firm.

HOW AND WHY DOES A MONOPOLY MARKET STRUCTURE EXISTS?

A monopoly exists when a single provider serves the entire market demand. Even
though there are several concepts of natural monopoly, they possess a common thread,
namely that rivalry in a particular market cannot be sustained and perhaps is even
inefficient. One idea of natural monopoly is that in some situations competition self-
destructs, resulting in a single firm supplying the entire market demand. This idea led to
the cost-based definition of natural monopoly, which states that a firm is a natural monopoly
if it is able to serve the entire market demand at a lower cost than any combination of two
or more smaller, more specialized firms.

OLIGOPOLY
Oligopoly is a market structure dominated by a few large producers or sellers of a
homogeneous or differentiated product.

CHARACTERISTICS
• Few sellers
 Republic of the Philippines
University of Antique
College of Business and Accountancy
Sibalom, Antique
• Either a homogeneous or a differentiated product. In an oligopolistic
market, the products offered by suppliers may be identical, or more
commonly, differentiated from each other in one or more respects. These
differences may be of a physical nature involving functional features, or may
be purely imaginary' in the sense that artificial differences are created through
advertising and sales promotion.
• Difficult market entry. High barriers to entry in an oligopoly protect firms
from new entrants. These barriers include 1.) exclusive financial
requirements; 2.) control over essential resources; 3.) patent rights; and 4.)
other legal barriers. But the most significant barriers to enter in an oligopoly
market are economies of scale. Economies of scale refers to the cost advantage
experienced by a firm when it increases its level of output.

ADDITIONAL CHARACTERISTICS OF OLIGOPOLY

• Product Branding. Each firm in the market is selling a branded
(differentiated) product.
• Entry Barriers. Significant entry barriers into the market prevent the dilution
of competition in the long run which maintains supernormal profits for the
dominant firms. It is perfectly possible for many smaller
firms to operate on the periphery of an oligopolistic market, but none of them
is large enough to have any significant effect on market prices and output.
• Interdependent Decision-making. Interdependence means that firms must
take into account likely reactions of their rivals to any change in price, output,
or forms of nonprice competition. In perfect competition and monopoly, the
producers did not have to consider a rival's response when choosing output
and price.
• Nonprice Competition. Nonprice competition is a consistent feature of the
competitive strategies of oligopolistic firms. Examples of nonprice competition
include: (a) free deliveries and installation; (b) extended warranties for
consumers and credit facilities; (c) longer opening hours (eg. supermarkets
and petrol stations); (d) branding of products and heavy spending on
advertising and marketing (e) extensive after-sales service; and (1) expanding
into new markets plus diversification of the product range.

OLIGOPOLY VERSUS MONOPOLISTIC COMPETITION

Monopolistic competition is a market dominated by many sellers/producers with
similar but differentiated products or services.
Example: burgers, soaps, clothing, grooming services
• In a monopolistic competition, entry and exit from the market is easy.
• Most sellers or producers are small or medium-scale firms/companies.
• Firms/companies are independent of each other.
Oligopoly is a market dominated by a few sellers of homogeneous or differentiated
products or services.
Example: telecom industry, soft drink industry, mass media, airline industry
• In an oligopoly market structure, entry to the market is difficult.
• Most sellers/producers are large-scale firms/companies.
• There is mutual interdependence among the sellers/producers.

CARTELS
A cartel is an organization created from a formal agreement between a group of
producers of a good or service to control supply or to regulate or manipulate prices.
A collection of independent businesses or countries that act together like a single
producer, cartel members may agree on prices, total industry output, market shares,
allocation of customers, allocation of territories, bid rigging, and the division of profits.
Having exclusive dealings and tiring contracts are illegal to the extent that perfect
competition is being restricted. Exclusive dealing is a contractual agreement between two
firms that limits outside firms to participate or engage in.

2 FORMS OF OLIGOPOLY
1. Duopoly. Duopoly is another form of oligopoly wherein two corporations produce
similar goods or services which are almost identical. In a duopoly, only two
 Republic of the Philippines
University of Antique
College of Business and Accountancy
Sibalom, Antique
companies have the entire control of the market and the firms' interactions with one
another shape of the market.
Example: Coca Cola and Pepsi, Apple and Samsung, Mastercard and Visa
In a duopoly, the set-up forces each producer to consider the rival firm's
actions to certain business decisions. When there's a duopoly in the market, the
consumers may tend to benefit from the actions of the two firms when they compete
on price since firms will drive the price down in order to keep up in the competition
with each other.
However, since there are only two firms sharing in the market, this condition
gives the duopolists an opportunity to agree and charge a monopolistic price in order
to gain profit.
2 Types of Duopoly
1. The Cournot Duopoly. The competition between two companies is based on the
quantity of products supplied, saying that it is the quantity which shapes the
competition between two firms.
The Cournot model believes that each company receives price values on the
availability of goods and services. So, the price each company receives for the product
is based on the numerical count or quantity of the produced goods. Equilibrium is
achieved when the two companies react to the changes in production of each other.
2. The Bertrand Duopoly. While the Cournot duopoly focused more on quantity, the
Bertrand duopoly focused on the price since this is what drives competition in the
market between two companies.
When given a choice between two goods and services which tend to be equal
or similar, consumers will go for the firm that will offer the best price.
2. Monopsony. Monopsony is similar to the concept of monopoly that has one seller
and many buyers. For monopsony, there is only one buyer but many sellers. The
buyer is called the monopsonist.

MONOPSONY, A DIFFERENT PERSPECTIVE ON OLIGOPOLY

Monopsony occurs when there is a market power exercised by a firm when employing
factors of production, giving the monopsonist the control when negotiating prices.
One example of monopsony is the case of one employer and many workers seeking
employment. Since there is only one employer, the market power in setting wages and the
number of how many will be given employment, rest mainly on the command of this one
major employer.
One example of monopsony is the supermarket industry which sources their food
and agricultural supplies from the farmers. If there are no products to sell to supermarkets,
it would be hard to look for alternative farm products.
Another example is the industry of coal mining in one province wherein employment
in this industry becomes the primary or the only source of employment in that specific town.

MARKET STRUCTURE AND INNOVATION

Market structure refers to the organizational and competitive characteristics of a
market, which influence how businesses operate and interact. It typically includes the
number of firms, the type of products offered, barriers to entry, and the degree of market
power held by companies. Common types of market structures include perfect competition,
monopolistic competition, oligopoly, and monopoly.
Innovation plays a critical role within these structures, as it can significantly impact
competition and market dynamics. In highly competitive markets, firms are often
incentivized to innovate to differentiate their products and gain a competitive edge.
Conversely, in monopolistic markets, innovation may be less frequent due to the lack of
competition. Overall, the interplay between market structure and innovation shapes how
industries evolve, influences consumer choices, and drives economic growth, with innovative
firms often reshaping market landscapes through new technologies and business models.

DEVELOPMENTS OF MARKET STRUCTURES

Important Developments of Market Structures
The fast changing business environment during the past decades has brought
about important developments in market structures. We can cite some of these
important developments as follows:
1. Increasingly most innovation is done by smaller firms. Indeed multinational
corporations are now outsourcing their research and development spending to small
 Republic of the Philippines
University of Antique
College of Business and Accountancy
Sibalom, Antique
businesses at home and overseas, much is being shifted to cheaper locations
"offshore"— in India and Russia and recently China.
2. Innovation is now a continuous process, in part because the length of the product
cycle is getting shorter as innovations are rapidly copied by competitors, pushing
down profit margins and according to a recent article in The Economist)
"Transforming today's consumer sensation into tomorrow's commonplace
commodity". A good example of this is the introduction of two major competitors to
the anti-impotence drug Viagra. However, this is more evident in the IT industry as
well as the tech gadgets market.
3. Innovation is not something left to chance. The most successful firms are those
that pursue innovation in a systematic fashion. One very good example is the
continuous innovations of Microsoft Corporation, which make the company the
leader in the software business.
4. Demand innovation is becoming more important. In many markets, demand is
either stable or in longrun decline. The response is to go for "demand innovation"-
discovering new forms of demand from consumers and adapting an existing product
to meet them. The toy industry is a classic example of this.
5. Globalization is driving innovation and not just in manufactured goods but across
a vast range of household and business services and in particular in high-value
knowledge industries.

Classic examples of innovation first achieved by smaller firms:

• Air-conditioning
• Hydraulic brakes
• Digital X-Rays
• Digital cameras
• Soft contact lenses
• Quick frozen food
• Zip fastener