MARKET STRUCTURES

Economists assume that there are a number of different buyers and sellers in the marketplace. For almost every product there are substitutes, so if one product becomes too expensive, a buyer can choose a cheaper substitute instead. In a market with many buyers and sellers, both the consumer and the supplier have equal ability to influence price.

Market structures

In some industries, there are no substitutes and there is no competition. In a market that has only one or few suppliers of a good or service, the producer(s) can control price, meaning that a consumer does not have choice, cannot maximize his or her total utility and has have very little influence over the price of goods.

Market structures

A monopoly is a market structure in which there is only one producer/seller for a product. Entry into such a market is restricted due to high costs or other impediments, which may be economic, social or political. For instance, a government can create a monopoly over an industry that it wants to control, such as electricity.

Monopoly

Another reason for the barriers against entry into a monopolistic industry is that oftentimes, one entity has the exclusive rights to a natural resource. For example, in Saudi Arabia the government has sole control over the oil industry.

Monopoly

In an oligopoly, there are only a few firms that make up an industry. This select group of firms has control over the price and, like a monopoly, an oligopoly has high barriers to entry. The products that the oligopolistic firms produce are often nearly identical and, therefore, the companies, which are competing for market share, are interdependent as a result of market forces.

Oligopoly

Assume, for example, that an economy needs only 100 widgets. Company X produces 50 widgets and its competitor, Company Y, produces the other 50. The prices of the two brands will be interdependent and, therefore, similar. So, if Company X starts selling the widgets at a lower price, it will get a greater market share, thereby forcing Company Y to lower its prices as well.

Oligopoly

Perfect competition describes a market structure where competition is at its greatest possible level. To make it more clear, a market which exhibits the following characteristics in its structure is said to show perfect competition:

Perfect competition

1. Large number of buyers and sellers,

2. homogenous product is produced by every firm,

3. free entry and exit of firms,

4. zero advertising cost,

5. consumers have perfect knowledge about the market and are well aware of any changes in the market. Consumers indulge in rational decision making.

Perfect competition

6. All the factors of production, viz. labour, capital, etc, have perfect mobility in the market and are not hindered by any market factors or market forces.

7. No government intervention

8. No transportation costs

9. Each firm earns normal profits and no firms can earn super-normal profits.

10. Every firm is a price taker. It takes the price as decided by the forces of demand and supply. No firm can influence the price of the product.

Perfect competition

Monopolistic competition is a form of imperfect competition where many competing producers sell products that are differentiated from one another. In monopolistic competition firms can behave like monopolies in the short-run, including using market power to generate profit. In the long-run, other firms enter the market and the benefits of differentiation decrease with competition; the market becomes more like perfect competition where firms cannot gain economic profit.

Monopoly competition

Monopolistically competitive markets have the following characteristics:

There are many producers and many consumers in a given market, and no business has total control over the market price.

Consumers perceive that there are non-price differences among the competitors' products.

There are few barriers to entry and exit.

Producers have a degree of control over price.

Monopoly competition