Market structure
Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell and how their operations are affected by external factors and elements. Market structure makes it easier to understand the characteristics of diverse markets.
The main body of the market is composed of suppliers and demanders. Both parties are equal and indispensable. The market structure determines the price formation method of the market. Suppliers and Demanders will aim to find a price that both parties can accept creating an equilibrium quantity.
Market definition is an important issue for regulators facing changes in market structure, which needs to be determined. The relationship between buyers and sellers as the main body of the market includes three situations: the relationship between sellers, the relationship between buyers and the relationship between buyers and sellers. The relationship between the buyer and seller of the market and the buyer and seller entering the market. These relationships are the market competition and monopoly relationships reflected in economics.
History
Market structure has been a topic of discussion for many economists like Adam Smith and Karl Marx, who have strong conflicting viewpoints on how the market operates in presence of political influence. Adam Smith, in his writing on economics stressed the importance of laissez-faire principles outlining the operation of the market in the absence of dominant political mechanisms of control, while Karl Marx discussed the working of the market in the presence of a controlled economy sometimes referred to as a command economy in the literature. Both types of market structure have been in historical evidence throughout the twentieth century and twenty-first century.Market structure has been apparent throughout history due to its natural influence it has on markets, this can be based on the different contributing factors that market up each type of market structure.
Types
Based on the factors that decide the structure of the market, the main forms of market structure are as follows:- Perfect competition refers to a type of market where there are many buyers and sellers that feature free barriers to entry, dealing with homogeneous products with no differentiation, where the price is fixed by the market. Individual firms are price takers as the price is set by the industry as a whole. Example: Agricultural products which have many buyers and sellers, selling homogeneous goods where the price is determined by the demand and supply of the market and not individual firms. In the short run, a firm in a perfectly competitive market may gain profits or loss, but in the long run, due to the entry and exit of new firms, price will equal the lowest point of average total cost.
- * Imperfect Competition refers to markets where standards for perfect competition are not fulfilled. All other types of competition come under imperfect competition.
- Monopolistic competition, a type of imperfect competition where there are many sellers, selling products that are closely related but differentiated from one another and hence they are not perfect substitutes. This market structure exists when there are multiple sellers who attempt to seem different from one another. Examples: toothpaste, soft drinks, clothing as they are all heterogeneous products with many buyers and sellers, no to low entry barriers but are different from each other due to quality, taste, or branding. Firms have partial control over the price as they are not price takers or Price Makers.
- Oligopoly refers to a market structure where only a small number of firms operate together control the majority of the market share. Firms are neither price takers or makers. Firms tend to avoid price wars by following price rigidity. They closely monitor the prices of their competitors and change prices accordingly. Oligopoly firms focus on quality and efficiency of their products to compete with other firms. Example: Network providers. Three types of oligopoly. Due to the hallmark of oligopoly being the presence of strategic interactions among rival firms, the optimal business strategy of an enterprise can be studied through the thought of game theory. Under the logic of game theory, enterprises in oligopoly market have interdependent behavior. These actions are non-cooperative, each company is making decisions that maximize its own profits, and equilibrium is reached when all businesses are doing their best, taking into account the actions of their competitors.
- *Duopoly, a case of an oligopoly where two firms operate and have power over the market. Example: Aircraft manufactures: Boeing and Airbus. A duopoly in theory could have the same effect as a monopoly on pricing within a market if they were to collude on prices and or output of goods.
- *Oligopsony, a market where many sellers can be present but meet only a few buyers. Example: Cocoa producers
- *Cournot quantity competition, one of the first models of oligopoly markets was developed by Augustin Cournot in 1835. In Cournot's model, there are two firms and each firm selects a quantity to produce, and the resulting total output determines the market price.
- *Bertrand Price Competition, Joseph Bertrand was the first to analyze this model in 1883. In Bertrand's model, there are two firms and each firm selects a price to maximize its own profits, given the price that it believes the other firm will select.
- Monopoly, where there is only one seller of a product or service which has no substitute. The firm is the price maker as they have control over the industry. There are high barriers to entry, which an incumbent would conduct entry-deterring strategies of keeping out entrants reaping additional profits for the company. Frank Fisher, a noticed antitrust economist has described monopoly power as "the ability to act in an unconstrained way," such as increasing price or reducing quality. Example: Standard Oil Under monopoly, monopoly firms can obtain excess profits through differential prices. According to the degree of price difference, price discrimination can be divided into three levels.
- *Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. 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.
- *Or natural obstacles, such as the sole ownership of natural resources, De beers was a monopoly in the diamond industry for years.
- *Monopsony, when there is only a single buyer in a market. Discussion of monopsony power in the labor literature largely focused on the pure monopsony model in which a single firm comprised the entirety of demand for labor in a market.
Features of market structures
Competition is useful because it reveals actual customer demand and induces the seller to provide service quality levels and price levels that buyers want, typically subject to the seller's financial need to cover its costs. In other words, competition can align the seller's interests with the buyer's interests and can cause the seller to reveal his true costs and other private information. In the absence of perfect competition, three basic approaches can be adopted to deal with problems related to the control of market power and an asymmetry between the government and the operator with respect to objectives and information: subjecting the operator to competitive pressures, gathering information on the operator and the market, and applying incentive regulation.
| Market Structure | Seller Entry & Exit Barriers | Nature of product | Number of sellers | Number of buyers | Price |
| Perfect Competition | No | Homogeneous | Many | Many | Uniform price as their price takers |
| Monopolistic competition | No | Closely related but differentiated | Many | Many | Partial control over price |
| Monopoly | Yes | Differentiated | One | Many | Price Maker |
| Duopoly | Yes | Homogeneous or Differentiated | Two | Many | Price rigidity due to price war |
| Oligopoly | Yes | Homogeneous or Differentiated | Few | Many | Price rigidity due to price war |
| Monopsony | No | Homogeneous or Differentiated | Many | One | Price taker |
| Oligopsony | No | Homogeneous or Differentiated | Many | Few | Price Taker |
The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly, and pure monopoly.
The main criteria by which one can distinguish between different market structures are: the number and size of firms and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely. In today's time, Karl Marx's theory about political influence on market makes sense as firms and industry are affected strongly by the regulation, taxes, tariffs, patents imposed by the government. These affect the barriers to entry and exit for the firms in the market.