Market Structure

Market Structure is composed of different firms that sell similar products of varying qualities.

Objectives:

• To Identify which existing market structure a business belongs
• To understand how the market system works.
• To examine why economists look at the degree of competition in the market.
• To discuss how competition influences market behavior and affects the way the market functions in the long run.

Competition changes the prices of goods and services, as well as the quantities produced or sold.

Perfect Competition no participant in the market can influence prices.

Imperfect Competition firms have some influence over market prices, albeit in varying degree.

Pure or perfect competition is a theoretical market structure in which the following criteria are met:

• All firms sell an identical product (the product is a “commodity” or “homogeneous”);
• All firms are price takers (they cannot influence the market price of their product);
• Market share has no influence on price; buyers have complete or “perfect” information – in the past, present and future – about the product being sold and the prices charged by each firm;
• Resources such as labor are perfectly mobile; and firms can enter or exit the market without cost.

Monopoly refers to a sector or industry dominated by one corporation, firm or entity. Monopolies can be considered an extreme result of free-market capitalism in that absent any restriction or restraints, a single company or group becomes large enough to own all or nearly all of the market (goods, supplies, commodities, infrastructure and assets) for a particular type of product or service. “Monopoly” can also be used to mean the entity that has total or near-total control of a market.

Oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. The concentration ratio measures the market share of the largest firms. A monopoly is one firm, duopoly is two firms and oligopoly is two or more firms. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly influence the others.

Monopolistic Competition characterizes an industry in which many firms offer products or services that are similar, but not perfect substitutes. Barriers to entry and exit in the industry are low, and the decisions of any one firm do not directly affect those of its competitors. All firms have the same, relatively low degree of market power; they are all price makers. In the long run, demand is highly elastic, meaning that it is sensitive to price changes. In the short run, economic profit is positive, but it approaches zero in the long run. Firms in monopolistic competition tend to advertise heavily.