Market structure: Types, Characteristics
- 1. MARKET STRUCTURE Dr. Devyanee K. Nemade Assistant Professor Department of Agricultural Economics & Statistics Dr. PDKV, Akola
- 2. MARKET STRUCTURE Meaning: The term structure refers to something that has organization and dimension – shape, size and design; and which is evolved for the purpose of performing a function.
- 3. By the term market structure we refer to the size and design of the market. It also includes the manner of the operation of the market. 1. Market structure refers to those organizational characteristics of a market which influence the nature of competition and pricing, and affect the conduct of business firms; 2. Market structure refers to those characteristics of the market which affect the, traders behavior and their performances; 3. Market structure is the formal organization of the functional activity of a marketing institution.
- 4. * Components of Market Structure: 1. Concentration of Market Power 2. Degree of Product Differentiation 3. Conditions for Entry of Firms in the Market 4. Flow of Market Information 5. Degree of Integration
- 5. 1. Concentration of Market Power: The concentration of market power is an important element determining the nature of competition. The number and size of firms existing in the market. The extent of concentration represents the control of an individual firm or a group of firms over the buying and selling of the produce. A high degree of market concentration restricts the movement of goods between buyers and sellers at fair and competitive prices, and creates an oligopoly or oligopsony situation in the market.
- 6. 2. Degree of Product Differentiation: If products are homogeneous, the price variations in the market will not be wide. When products are heterogeneous, firms have the tendency to charge different prices for their products. Everyone tries to prove that his product is superior to the products of others.
- 7. 3. Conditions for Entry of Firms in the Market: Another dimension of the market structure is the restriction, if any, on the entry of firms in the market. Sometimes, a few big firms do not allow new firms to enter the market or make their entry difficult by their dominance in the market. There may also be some government restrictions on the entry of firms.
- 8. 4. Flow of Market Information: A well-organized market intelligence information system helps all the buyers and sellers to freely interact with one another in arriving at prices and striking deals.
- 9. 5. Degree of Integration: The behavior of an integrated market will be different from that of a market where there is no or less integration either among the firms or of their activities. Firms plan their strategies in respect of the methods to be employed in determining prices, increasing sales, co-ordinating with competing firms and adopting practices.
- 10. Dynamics of Market Structure – Conduct and performance: For a satisfactory market performance, the market structure should keep pace with the following changes: 1. Production Pattern: Significant changes occur in the production pattern because of technological, economic and institutional factors. The market structure should be re-oriented to keep pace with such changes.
- 11. 2. Demand Pattern The demand for various products, specially in terms of form and quality, keeps on changing because of change in incomes, the pattern of distribution among consumers, and changes in their tastes and habits. The market structure should be re-oriented to keep it in harmony with the changes in demand. (eg. Engle’s law of consumption)
- 12. 3. Costs and Patterns of Marketing Functions: Marketing functions such as transportation, storage, financing and dissemination of market information, have a great bearing on the type of market structure. Government policies with regard to purchases, sales and subsidies affect the performance of market functions. The market structure should keep on adjusting to the changes in costs and government policy.
- 13. 4. Technological Change in Industry: Technological changes necessitate changes in the market structure through adjustments in the scale of business, the number of firms, and in their financial requirements.
- 14. Forms of Market Structure: On the basis of competition, a market can be classified in the following ways: A. Perfect Competition B. Imperfect Competition 1. Monopoly 2. Duopoly 3. Oligopoly 4. Monopolistic Competition
- 15. A. Perfect Competition Market: Perfect competition is a market structure in which there are many sellers and buyers transacting a homogenous product. *
- 16. Characteristics of Perfect Competition: 1. Large number of buyers and sellers 2. Homogenous product 3. Free Entry or Exit of Firms: The next condition is that the firms should be free to enter or leave the industry. It implies that whenever the industry is earning excess profits, attracted by these profits some new firms enter the industry. 4. No Government Regulation: Sellers are free to sell their goods to any buyers and the buyers are free to buy from any sellers. *
- 17. 5. Perfect Knowledge in Market condition: This condition implies a close contact between buyers and sellers. Buyers and sellers possess complete knowledge about the prices at which goods are being bought and sold, and of the prices at which others are prepared to buy and sell. 6. Absence of Transport Costs: Another condition is that there are no transport costs in carrying of product from one place to another. If transport costs are added to the price of the product, even a homogeneous commodity will have different prices depending upon transport costs from the place of supply.
- 18. 7. Profit Maximisation Goal: Every firm has only one goal of maximising its profits. 8. Absence of Selling Costs: Under perfect competition, the costs of advertising, sales-promotion, etc. do not arise because all firms produce a homogeneous product.
- 19. B. Imperfect Competition: 1. Monopoly: Monopoly is a market situation in which there is only one seller of a product. No other firms produce a similar product. There is a single firm selling a commodity for which there are no close substitutes. For eg.: Railway 2. Duopoly: A duopoly market is one which has only two sellers of a commodity.
- 20. 3. Oligopoly Market: A market in which there are more than two but still a few sellers of a commodity is termed as an oligopoly market. Pure oligopoly is found primarily among producers of such industrial products as aluminium, cement, copper, steel, zinc, etc. Imperfect oligopoly is found among producers of such consumer goods as automobiles, cigarettes, soaps and detergents, TVs, rubber tyres, refrigerators, typewriters, etc.
- 21. Characteristics of Oligopoly: In addition to fewness of sellers, most oligopolistic industries have several common characteristics which are explained below: 1. Interdependence: Each oligopolist firm knows that changes in its price, advertising, product characteristics, etc. may lead to counter-moves by rivals. He can reduce or increase the price for the whole oligopolist market by selling more quantity or less and affect the profits of the other sellers. It implies that each seller is aware of the price-moves of the other sellers and their impact on his profit.
- 22. (2) Advertisement: “Under oligopoly advertising can become a life- and-death matter.” For example, if all oligopolists continue to spend a lot on advertising their products and one seller does not match up with them he will find his customers gradually going in for his rival‟s product. If, on the other hand, one oligopolist advertises his product, others have to follow him to keep up their sales.
- 23. (3) Competition: This leads to another feature of the oligopolistic market, the presence of competition. Each seller is always on the alert and keeps a close watch over the moves of its rivals in order to have a counter-move. This is true competition.
- 24. 4. Lack of Uniformity: Another feature of oligopoly market is the lack of uniformity in the size of firms. Some may be small, others very large. Such a situation is asymmetrical. This is very common in the American economy.
- 25. Monopolistic competition: When a large number of sellers deal in heterogeneous and differentiated form of a commodity, the situation is called monopolistic competition. For example, they have to choose between various makes of insecticides, pumpsets, fertilizers and equipments.
- 26. The following are the main features of monopolistic competition: (1) Large Number of Sellers: In monopolistic competition the number of sellers is large. 2) Product Differentiation: One of the most important features of the monopolistic competition is differentiation. For example, they have to choose between various makes of insecticides, pumpsets, fertilizers and equipment.
- 27. (3) Freedom of Entry and Exit of Firms: Another feature of monopolistic competition is the freedom of entry and exit of firms. (4) Product Groups: There is no any „industry‟ under monopolistic competition but a „group‟ of firms producing similar products. Each firm produces a distinct product and is itself an industry. For eg.: Product groups, such as cars, cigarettes, etc.
- 28. (5) Selling Costs: Under monopolistic competition where the product is differentiated. Selling costs are essential to push up the sales. Besides, advertisement, it includes expenses on salesman, free service, free sampling, premium coupons and gifts, etc.