Market Structure

Micro Economics

Market Structure
Market structure identifies how a market
is made up in terms of:
The number of firms in the industry
The nature of the product produced
The degree of monopoly power each firm has
The degree to which the firm can influence price
Profit levels
Firms behaviour pricing strategies, non-price competition, output
levels
The extent of barriers to entry
The impact on efficiency

Structural characteristics of a market

The number of firms and the extent of overseas competition (e.g. from
within the single market or in global markets)
The market share of the largest businesses (measured by the
concentration ratio)
The nature of costs in the short and long run
The degree to which an industry is vertically integrated up and down the
supply chain (e.g. forward and backward vertical integration)
The extent of product differentiation / product branding
Price and cross price elasticity of demand
The number and size of buyers of the industrys product
The turnover of customers from one seller to another (also called market
churn) this is affected by brand loyalty and the effects of advertising and
marketing

Types of Market Structure

Different types of market

structure include:
1. Perfect Competition
2. Monopoly
3. Oligopoly

Three Basic Market Structures

Perfectly Competitive: many firms, identical

products, free entry and exit, full and symmetric info
Monopoly: single firm, no close substitutes,
barriers to entry, full and symmetric info
Oligopoly: several firms, similar products, degree
of product differentiation varies depending upon the
market, might be barriers, full and symmetric info

Perfect Competition
Perfect competition is a market situation where single
buyers or seller are unable to influence price of
commodity.
Free entry and exit to industry
Homogenous product identical so no consumer
preference
Large number of buyers and sellers no individual seller
can influence price
Sellers are price takers have to accept the market price
Perfect information available to buyers and sellers

A Perfectly Competitive Market

A perfectly competitive market must meet the
following requirements:
Both buyers and sellers are price takers.
The number of firms is large.
There are no barriers to entry.
The firms' products are identical.
There is complete information.
Firms are profit maximizers.

Perfect Competition

Examples of perfect competition:

Financial markets stock exchange,

currency markets, bond markets
Agriculture

Advantages of Perfect Competition

High degree of competition helps allocate

resources to most efficient use
Price = marginal costs
Normal profit made in the long run
Firms operate at maximum efficiency
Consumers benefit

Monopoly
Monopoly is a market form which is controlled by a
single firm.
single firm
no close substitutes
barriers to entry
full and symmetric information

Example of Monopoly

Railway
WAPDA
Post office

Characteristics of Monopoly
Price Control
Lack of Innovation
Lack of Competition
Free entry and exit
Lack of perfect knowledge of the market
Advertisement Cost

Advantages of monopoly

Economies of scale and scope.

Possibility of lower cost curves due to more
research and development
Innovation and newer products
Potentially lower prices for consumers through
economies of scale.

Disadvantages of Monopoly
Lack of consumer choice
High barriers of entry
Exploitation- e.g. Tesco place huge pressures on
suppliers and can dictate to an extent the price at
which they buy.
Potentially higher pricing for consumers.

Oligopoly
Oligopoly is a market structure dominated
by a few large producers of homogeneous or
differentiated products.
Because of their fewness, oligopolists have
considerable control over their price.
Examples: tires, cigarettes, copper, greeting
cards, steel, automobiles and breakfast cereals

Basic Examples of Oligopolies

Petrol Retailing
National Food Retailers
Hotel Industry
Electrical Retailing
Leading Commercial Banks
Telecommunications Industry
Pharmaceutical companies
Soft drinks manufacturers
Low cost airlines

Characteristics of Oligopoly

A few large producers firms are generally large

and together they dominate the industry.
Either homogeneous or differentiated products
the products are standardized, or differentiated with
heaving advertising.
Price maker the firm can set its price and output
levels to maximize its profit.

Characteristics of Oligopoly
Oligopolies are made up of a small number of firms
in an industry
In any decision a firm makes, it must take into
account the expected reaction of other firms
Oligopolistic firms are mutually interdependent
Oligopolies can be collusive or noncollusive
Firms may engage in strategic decision making
where each firm takes explicit account of a rivals
expected response to a decision it is making