CSEC ECONOMICS -MARKET STRUCTURE

Market Structure is defined as the features/characteristics that determine the behavior and
performance of firms in the industry. (How the market operates)
o In the economy, there are many different types of firms, each producing different
products. Economists prefer to classify firms and industries according to the type of
market in which they operate.
The following are all examples of market structures:
o Perfect competition
o Monopoly
o Monopolistic competition
o Oligopoly
Perfect competition

Perfect competition is a market structure in which there are many sellers and many buyers
producing a homogeneous product. This is a market structure where many sellers produce
the same type of good/product.
Examples of Perfect Competition
- Consider a farmers’ market where each vendor sells the same type of jam.
- Foreign exchange markets (Stock Exchange)
- Gas Station
Features of perfect competition:
o There are many sellers in the industry.
o There are many buyers.
o It is a homogeneous market, in which each unit of the product is identical.
o There is perfect knowledge in the market.
o No one firm can influence price.
o The firm is said to be a price taker. The firms would have to take the market price and use that
to sell their products.
o There is freedom of entry and exit. A new firm can enter the industry and start producing at
any time and an existing firm is free to leave the industry. There are no restrictions.
o Perfect Competition is a theoretical concept, and, in the real world, there are no perfect
markets.

Perfect knowledge - all buyers and sellers are aware of the product, its features, its price, and
they are aware of other buyers and sellers. Perfect knowledge can also be defined as
consumers have all readily available information about prices and products from competing
suppliers and can access this at zero (0) cost.
Price taker – A producer who has no power to influence prices.
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In the perfect competition, the market structure will stay the same for a long period of time,
unless there is a radical change.
Monopoly
A monopoly is a market in which there is only one seller and there are many buyers. The one
firm is the only producer of the good or service.
Features of the Monopoly:

o There is one seller.

o There are many buyers.
o There is no competition, as the firm has no other firm with which to compete.
o The product is unique and has no close substitutes.
o There is imperfect knowledge in the market.
o The monopolists can only sell more at a lower price, and if price increases, less would
be sold.
o The firm produces a given quantity and sells it at the price the market is willing to pay.
o The firm is a price maker.
o There are extreme barriers to entry. These prevent firms from entering the industry.

Imperfect knowledge – This means that buyers and sellers are not aware of all the
information in the market.
Price maker – The firm can determine the price of their product. A price maker is a firm
who has enough market power to influence prices.
Some examples of Monopolies are as follows:
o Carib Brewery Ltd in Trinidad
o State owned water companies
o State owned electricity companies
Barriers to entry for Monopolies: A barrier to entry is anything that prevents new firms from
entering and competing in an industry. The following are some barriers to entry in a
monopoly:
o Government regulations- These are laws that prevent new firms from entering an
industry. For example, in Caribbean economies there is only one firm providing water
due to government regulations.
o Patents- A patent grants the inventor exclusive rights to the patented products or
process. The monopoly is the only firm that can produce a commodity in a specific
manner. The patent would make it illegal for others to engage in producing the product.
The firm would be able to sue those who do not abide by the patent.
o Large capital outlay- This prevents smaller firms from entering an industry. For
example, oil refining. It is very expensive for a smaller firm to engage in the oil
industry.
o Ownership by the firm of a scarce factor of production- Secret recipes and trade
secrets are owned by monopolies. For example, Angostura Trinidad Ltd is the only firm
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that possesses knowledge of the secret ingredient in the Angostura bitters recipe. (This
is the factor ‘capital’ or ‘know-how.’
In the monopoly, the market structure will stay the same, unless there is some radical change.
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Monopolistic Competition

Monopolistic competition is a market structure in which there is competition amongst many

firms. In this market structure, there are some features of a monopoly and there are some
features of perfect competition.
Features of monopolistic competition:
o There are many buyers and sellers.
o The product is similar yet differentiated through branding. (This is product
differentiation)
o Production differentiation gives the individual firm some degree of market power.
o There is imperfect knowledge.
o Firms are price makers.
o There are some barriers to entry. These barriers are not that difficult to break through.

Some common examples of firms that operate under monopolistic competition are as
follows:
o Restaurants
o Hair salons
o Beauty salons
o Supermarkets
In this market structure, a firm can experience different situations in both the short-run and
the long-run.

Product differentiation – This means the product is made to look different in the eyes of the
consumer. For example, shoes. There are many different shoe companies. Companies such as
Nike, Adidas and Sketchers produce a similar good (shoes) but each company utilizes
branding and marketing differently. Each company would brand and design their show
differently.
o Production differentiation gives the individual firm some degree of market power. For
example, assume one only firm produces Grace jerk seasoning. There is no substitute
for Grace jerk seasoning, even though other firms produce jerk seasoning. Loyal
customers might only purchase Grace jerk seasoning. These customers would be loyal
to the Grace brand.
o Firms can be price makers. For example, Nike can charge whatever price they want
for their shoes. Nike could charge different prices for their shoes as compared to other
shoe companies. Nike could believe that their product is specific or unique.

Firms within this market structure are price makers. They can determine their price. This is
based on the fact that their product is different when compared to others.
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Oligopoly

An oligopoly is a market structure in which there are few firms competing in the market.
Some examples of an oligopoly in the region include:
o Commercial banks
o Beer brewing
o Petrol refining
o Household detergent producers
o Producers who produce personal care products.
Features of an oligopoly.
 There are many buyers.
 There are few sellers.
 The product might be homogeneous or differentiated. An example of a homogeneous
product would be unleaded petrol. An example of a differentiated product would be
detergents.
 There is imperfect knowledge in the market.
 Firms avoid price competition and so prices remain rigid or there is price stickiness.
 If firms increase prices, competitors will not follow. And so, the given firm will lose
customers to its rivals. (The given firms being the firm that increase prices.)
 Oligopolies might choose to enter into agreements with or collude with other firms to
maximize profits.
 There are high barriers to entry. This is due to the high set up costs.
 Oligopolies are typical in the real world.

Price rigidity means that prices remain at a certain level over a long period of time. Few
sellers would not want to have a price war. It would not be in their best interest. If they
engaged in a price war, only the biggest firm or firms would win. The smaller firms would
not be able to compete.
o A price war occurs when rival firms continuously reduce prices to undercut each
other.
o Collusion occurs when there are price and quantity agreements with other firms.

A group of sellers colluding this way is called cartel. In many countries, cartels are illegal. A
good example of a cartel would be Oil Producing Nations (OPEC). These companies agree
on all terms. There is some collusion in the airline industry as well. Many different airlines
charge the same price for their tickets.
o Firms in OPEC (Oil Producing Nations) would charge the same price for their oil.
They would also have quantity agreements. Airlines generally charge the same price
for their tickets.
o Drugs cartels are also an example of a collusion. However, these are illegal.
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The following images summarize all what was stated.