Market Structure and Types of Market Structures

Market Structure and Types of Market Structures

Market structure is best defined as the structural/organisational and other characteristics of a market. Market structure is the number of firms producing identical goods, which are homogeneous in nature. The major yardstick by which one can distinguish between different market structures are the number and size of producers and consumers in the market, types of goods and services being traded, and the degree to which information can flow freely. We focus on those characteristics, which affect the nature of competition and pricing.

Types of Market Structures
The types of market structures include the following: 
1. Perfect competitive market: Perfect competition exists in an industry where perfect competition is characterised by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes. Perfect competition means there are few, if any, barriers to entry for new companies, and prices are determined by supply and demand. Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage.

2. Imperfect competitive market: The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, oligosopnists, and monopsonists operate.

Market Structures

Monopolistic Competition
A monopolistic competitive market has characteristics of both perfect competitive and monopoly. Similar to perfect competition, monopolistic competitive has many buyers and sellers, and free exit and entry. Related to monopoly, the products are differentiated and each company faces a downward sloping demand curve. Since the company has a differentiated product, it is like a monopolist and faces a negatively sloped demand curve. In the short run:

marginal revenue is always less than demand,

profit is maximised where MR = MC

profit = (price - average total cost) x quantity.

Features of Monopolistic Competitive Market
These are few but very important features of monopolistic competition; they include the following:

1.Product Differentiation
It is a fact that monopolistic competitive firms sell products that have real or perceived non-price differences. Those differences are not so extraordinary as to disregard other goods as substitutes. Technically, the cross price elasticity of demand between goods in such a market is positive. Monopolistic competitive firm goods are best described as close but imperfect substitutes. The goods perform the same basic functions but have differences in qualities such as type, style, quality, reputation, appearance, and location that tend to differentiate them from each other. For example, the basic function of mobile phone is basically the same - to make call to people and text messages in reasonable clarity. In spite of that, there are many different types of phones such as blackberry, android, iphone, and many variations even within these categories.

2. Many Buyers And Sellers In The Industry
Many firms in each monopolistic competitive product group and many firms are also waiting to make entry into the industry. A product group is a "collection of goods with the features”. With this reason i.e. existence of many firms, it gives each monopolistic competitive firm the freedom to set prices without participating in the act of strategic decision making regarding the prices of other firms and each firm's actions have an insignificant impact on the market. For example, a firm. could cut prices and increase sales without anxiety that its actions will prompt retaliatory responses from competitors.

How many firms will a monopolistic competitive market structure support at market equilibrium? This depends on factors such as fixed costs, economies of scale and the degree of product differentiation. For example, the higher the fixed costs, the fewer firms the market will support. Also, the greater the degree of product differentiation - the more the firm can separate itself from the pack - the fewer firms there will be at market equilibrium.

3. Free Entry And Exit

There are numerous firms waiting to enter the market each with its own "unique" product or in pursuit of positive profits and any firm unable to cover its costs can leave the market without incurring liquidation costs in the long run. This implies that there are low capital to start up, no sunk costs and no exit costs. The cost of entering and exit is very low.

4. Independent Decision Making
The monopolistic competitive firm gives no concern to what impact its decision may have on competitors/ rivals in the market. The theory is that any action will have such an insignificant effect on the market demand as whole that a monopolistic competitive firm can act without fear of prompting intensify competition. In other words, each firm feels free to set prices as if it were a monopoly rather than an oligopoly.

5. Some Degree Of Market Power
Monopolistic competitive firms have some degree of market power. Market power means that the firm has control over the terms and conditions of exchange. A monopolistic competition firm can increase it prices without dropping all its customers. The firm can also reduce prices without causing a potentially ruinous price war with competitors. The source of a monopolistic competitive firm’s market power is not barriers to entry since they are low. Reasonably, a monopolistic competitive firm has market power because it has relatively few competitors, those competitors do not engage in strategic decision making and the firm sells differentiated product. Market power also means a monopolistic competitive firm faces a downward sloping demand curve. The demand curve is extremely elastic although not "perfect".

6. Imperfect information available to buyers and sellers
No sellers or buyers have all the market information, especially market demand or market supply.

Oligopoly Market Structure
An oligopoly is where there are a few sellers with similar or identical products. Monopolistic competition has many companies with similar but not identical products as earlier explained. Each firm has monopoly power over what it produces, however products are close substitutes. Examples include cigarettes, CDs, and computer games. Examples of oligopolies include crude oil businesses, phone makers and auto manufacturers.In an oligopoly industry, there are few firms; thus, each firm's output represents a large share of the market. Because of this, each firm's pricing and output decisions have a substantial effect on the profitability 
of other firms.

Furthermore, when making decisions concerning price or output, each firm has to take into account the expected reaction of rival firms. If Nokia lowers the price of their smart phones, for example, the effect on their profits would be very different if Blackberry company responded by lowering the price on their phone say Curve 3 by a larger amount. Because of this mutual interdependence, oligopoly firms engage in strategic behaviour. Strategic behaviour occurs when the best outcome for one party is determined by the actions of other parties.

Oligopoly Behaviour

Oligopolistic industries share several behavioural tendencies, including:

(1) interdependence, (2) rigid prices, (3) non-price competition, (4) mergers, and (5) collusion. In other words, each oligopolistic firm keeps a close eye on the decisions made by other firms in the industry (interdependence). They are reluctant to change prices (rigid prices); instead, they try to attract customers from the competition using incentives other than prices (non-price competition), and when they get tired of competing with their competitors, they are inclined to cooperate formally and legally (mergers) or informally and illegally (collusion).

Oligopolistic industries are nothing if not diverse. Some sell identical products, others differentiated products. Some have three or four firms of nearly equal size, others have one large dominate firm (a clear industry leader) and a handful of smaller firms (that follow the leader). Some sell intermediate goods to other producers others sell consumer goods directly to the public. 

However, through this diversity, all oligopolistic industries engage in similar types of behaviour. The most noted behavior tendencies are: interdependent decision making, relatively constant prices, competition in ways that do not involve prices, the legal merger of two or more firms, and the illegal collusion among firms to control price and production.