In this post, we discussed the meaning of market structure, the feature and we also talked about the types of market structure.
Definition
Market structure refers to the way that various industries are classified and differentiated in accordance with their degree and nature of competition for products and services.
A market structure is an economic environment where a business operates. The market structure can describe how competitive the industry is by considering factors like how challenging it is to enter the industry and how many sellers participate. It also considers relationships between companies and customers to show how prices vary.
Understanding Market Structures
In economics, market structures can be understood well by closely examining a range of factors or features exhibited by different players “Market structures” refer to the different market characteristics that determine relations between sellers to each another, of sellers to buyers and more. There are several basic defining characteristics of a market structure, such as the following:
- The commodity or item that’s sold and the extent of production differentiation.
- The ease or difficulty of entering and exiting the market.
- The distribution of market share for the largest firms.
- The number of companies in the market.
- The number of buyers and how they work with or against the sellers to dictate price and quantity.
- The relationship between sellers.
Types of Market Structures
There are four basic types of market structures.
Perfect competition
A perfect competition market structure contains many companies. While economists don’t exactly define how many companies this requires, it’s enough so that each company has little influence over the market. There’s a lot of competition within this market structure because it has few barriers to entry. Companies can easily join the industry because of low startup costs and the wide in this market, all companies sell the same product at about the same price, with price fluctuations being very rare. A company can try to raise its price, but it’s unlikely for a customer to buy it because they can buy the same product from a competitor at a lower price availability of resources.
Monopolistic competition
A monopolistic competition market structure features many sellers, meaning that it’s easy to enter the industry. Combining aspects of a monopoly and competitive market, companies within a monopolistic structure can sell products that are similar but feature slight differences. This allows them to have a small amount of market power based on how they differentiate products.
For instance, a company might notice users will pay a little more for a product with a few unique features. To meet demand and increase profits, the company raises the price of this unique product. If the price goes too high or consumers decide they want a cheaper product, they look for a substitute. The monopolistic competition allows them to find a suitable alternative for a lower price,
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 steadiness 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.
Pure Monopoly
A monopoly exists when there’s a single firm that controls the entire market. The firm and industry are synonymous. This firm is the sole producer of a product, and there are no close substitutes. Because there are no alternatives, the firm has the highest level of market power. Hence, monopolists often reduce output, increase prices and earn more profit.
Entry or exit is blocked in a pure monopoly. This can occur for more than one reason, as seen in two of the best examples for pure monopolies: public utilities and professional sports leagues.
Public utilities are considered natural monopolies because they have economies of scale — a firm receives certain cost advantages due to its size — in an extreme way. New firms cannot start up because it would be incredibly expensive to reach scale in a short amount of time. Building a maze of pipes and wires to be able to compete with the firm would require a lot of capital, and there would be legal barriers to entry. That’s why there are typically government monopolies (or government regulations) for natural monopolies.
Features of market structures
Some of the features that go into market structure consideration include:
Seller entry barriers, or how hard it is for a new company to emerge within the market
Seller exits barriers, or how hard it is for a new company to leave the market
The degree to which company products are homogeneous or differentiated
Number of companies in the market
Number of customers who participate in the market
Product prices.
Conclusion
Market structure, is 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.