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    Market structure

    Market structure

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    Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) 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 (sellers and buyers) will aim to find a price that both parties can accept creating a equilibrium quantity.

    Market definition is an important issue for regulators facing changes in market structure, which needs to be determined.[1] The relationship between buyers and sellers as the main body of the market includes three situations: the relationship between sellers (enterprises and enterprises), the relationship between buyers (enterprises or consumers) 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.

    Contents

    1 History 2 Types

    3 Features of market structures

    4 Importance of Market Structure

    5 Measure of market structure

    6 See also 7 References 8 External links

    History[edit]

    See also: Laissez-faire

    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[2] 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[edit]

    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 seller 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 taker[3] 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.

    Imperfect Competition refers to markets where standards for perfect competition are not fulfilled (such as no barriers for entry and exit, homogeneous products and many buyers and sellers). 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 (e.g. quality of products may differentiate) 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 all are homogeneous products with many buyers and sellers, no to low entry barriers but are different from each other due to quality, taste, branding. Firms have partial control over the price as they are not price takers (due to differentiated products) or Price Maker (as there are many buyers and sellers).[4]

    Oligopoly, refers to market structure where only 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 war 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[5] ( Entry barriers, Small number of sellers, many buyers, products can be homogeneous or differentiated). Three types of oligopoly.

    Duopoly, a ase of an oligopoly where two firms operate and have power over the market.[6] 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.

    Source : en.wikipedia.org

    Types of Market Structures: Oligopoly, Monopoly, Perfect Competition etc.

    As we have seen, in economics the definition of a market has a very wide scope. So understandably not all markets are same or similar. We can characterize market structures based on the competition levels and the nature of these markets. Let us study the four basic types of market structures.

    Meaning and Types of Markets

    Types of Market Structures

    As we have seen, in economics the definition of a market has a very wide scope. So understandably not all markets are the same or similar. We can characterize market structures based on the competition levels and the nature of these markets. Let us study the four basic types of market structures.

    Types of Market Structures

    A variety of market structures will characterize an economy. Such market structures essentially refer to the degree of competition in a market.

    There are other determinants of market structures such as the nature of the goods and products, the number of sellers, number of consumers, the nature of the product or service, economies of scale etc. We will discuss the four basic types of market structures in any economy.

    One thing to remember is that not all these types of market structures actually exist. Some of them are just theoretical concepts. But they help us understand the principles behind the classification of market structures.

    (Source: BusinessJargons)

    1] Perfect Competiton

    In a perfect competition market structure, there are a large number of buyers and sellers. All the sellers of the market are small sellers in competition with each other. There is no one big seller with any significant influence on the market. So all the firms in such a market are price takers.

    There are certain assumptions when discussing the perfect competition. This is the reason a perfect competition market is pretty much a theoretical concept. These assumptions are as follows,

    The products on the market are homogeneous, i.e. they are completely identical

    All firms only have the motive of profit maximization

    There is free entry and exit from the market, i.e. there are no barriers

    And there is no concept of consumer preference

    2] Monopolistic Competition

    This is a more realistic scenario that actually occurs in the real world. In monopolistic competition, there are still a large number of buyers as well as sellers. But they all do not sell homogeneous products. The products are similar but all sellers sell slightly differentiated products.

    Now the consumers have the preference of choosing one product over another. The sellers can also charge a marginally higher price since they may enjoy some market power. So the sellers become the price setters to a certain extent.

    For example, the market for cereals is a monopolistic competition. The products are all similar but slightly differentiated in terms of taste and flavours. Another such example is toothpaste.

    3] Oligopoly

    In an oligopoly, there are only a few firms in the market. While there is no clarity about the number of firms, 3-5 dominant firms are considered the norm. So in the case of an oligopoly, the buyers are far greater than the sellers.

    The firms in this case either compete with another to collaborate together, They use their market influence to set the prices and in turn maximize their profits. So the consumers become the price takers. In an oligopoly, there are various barriers to entry in the market, and new firms find it difficult to establish themselves.

    4] Monopoly

    In a monopoly type of market structure, there is only one seller, so a single firm will control the entire market. It can set any price it wishes since it has all the market power. Consumers do not have any alternative and must pay the price set by the seller.

    Monopolies are extremely undesirable. Here the consumer loose all their power and market forces become irrelevant. However, a pure monopoly is very rare in reality.

    Solved Question on Market Structures

    Q: The cellular industry is an example of which of the following?

    Monopolistic Competition

    Monopoly Perfect Competition Oligopoly

    Ans: The correct option is D. In the cellular industry there are 3-5 dominant firms (Airtel, Vodafone, Jio etc). These are the price setters. And consumers have a limited choice between these few choices.

    Source : www.toppr.com

    Market Structure

    Market structure, in economics, refers to how different industries are classified and differentiated based on their degree and nature of competition

    Market Structure

    How different industries are classified and differentiated based on their degree and nature of competition for services and goods

    Written by CFI Team

    Updated April 23, 2022

    What is Market Structure?

    Market structure, in economics, refers to how different industries are classified and differentiated based on their degree and nature of competition for goods and services. It is based on the characteristics that influence the behavior and outcomes of companies working in a specific market.

    Some of the factors that determine a market structure include the number of buyers and sellers, ability to negotiate, degree of concentration, degree of differentiation of products, and the ease or difficulty of entering and exiting the market.

    Summary

    Market structure refers to how different industries are classified and differentiated based on their degree and nature of competition for services and goods.The four popular types of market structures include perfect competition, oligopoly market, monopoly market, and monopolistic competition.Market structures show the relations between sellers and other sellers, sellers to buyers, or more.

    Understanding Market Structures

    In economics, market structures can be understood well by closely examining an array of factors or features exhibited by different players. It is common to differentiate these markets across the following seven distinct features.

    The industry’s buyer structure

    The turnover of customers

    The extent of product differentiation

    The nature of costs of inputs

    The number of players in the market

    Vertical integration extent in the same industry

    The largest player’s market share

    By cross-examining the above features against each other, similar traits can be established. Therefore, it becomes easier to categorize and differentiate companies across related industries. Based on the above features, economists have used this information to describe four distinct types of market structures. They include perfect competition, oligopoly market, monopoly market, and monopolistic competition.

    Types of Market Structures

    1. Perfect Competition

    Perfect competition occurs when there is a large number of small companies competing against each other. They sell similar products (homogeneous), lack price influence over the commodities, and are free to enter or exit the market.

    Consumers in this type of market have full knowledge of the goods being sold. They are aware of the prices charged on them and the product branding. In the real world, the pure form of this type of market structure rarely exists. However, it is useful when comparing companies with similar features. This market is unrealistic as it faces some significant criticisms described below.

    No incentive for innovation: In the real world, if competition exists and a company holds a dominant market share, there is a tendency to increase innovation to beat the competitors and maintain the status quo. However, in a perfectly competitive market, the profit margin is fixed, and sellers cannot increase prices, or they will lose their customers.There are very few barriers to entry: Any company can enter the market and start selling the product. Therefore, incumbents must stay proactive to maintain market share.

    2. Monopolistic Competition

    Monopolistic competition refers to an imperfectly competitive market with the traits of both the monopoly and competitive market. Sellers compete among themselves and can differentiate their goods in terms of quality and branding to look different. In this type of competition, sellers consider the price charged by their competitors and ignore the impact of their own prices on their competition.

    When comparing monopolistic competition in the short term and long term, there are two distinct aspects that are observed. In the short term, the monopolistic company maximizes its profits and enjoys all the benefits as a monopoly.

    The company initially produces many products as the demand is high. Therefore, its Marginal Revenue (MR) corresponds to its Marginal Cost (MC). However, MR diminishes over time as new companies enter the market with differentiated products affecting demand, leading to less profit.

    3. Oligopoly

    An oligopoly market consists of a small number of large companies that sell differentiated or identical products. Since there are few players in the market, their competitive strategies are dependent on each other.

    For example, if one of the actors decides to reduce the price of its products, the action will trigger other actors to lower their prices, too. On the other hand, a price increase may influence others not to take any action in the anticipation consumers will opt for their products. Therefore, strategic planning by these types of players is a must.

    In a situation where companies mutually compete, they may create agreements to share the market by restricting production, leading to supernormal profits. This holds if either party honors the Nash equilibrium state and neither is tempted to engage in the prisoner’s dilemma. In such an agreement, they work like monopolies. The collusion is referred to as cartels.

    Source : corporatefinanceinstitute.com

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