Market structure

Market structure refers to the characteristics and organization of a market that influence the behavior of buyers and sellers, the level of competition, and the determination of prices and output. There are four main types of market structures, each with distinct features:

1. Perfect competition.

 Perfect competition has been assumed by the economists as a market structure for the convenience of analysis. Without such an assumption it was impossible to state the laws of economics. According to Prof. H. M. Callan, competition is the life force of all sciences. Economics is in no way an exception to this rule. In economics, perfectly competitive market is required to fulfill certain conditions. They are briefly explained below:

1) Large number of buyers and sellers: This is the first and the most important condition of perfect competition. When the number of buyers and sellers is large, no single seller or buyer can influence market conditions and price of commodity in the market. Every buyer and seller would be an insignificant entity. As a result, the demand for and supply of a commodity will not be affected by individual action of a single seller or buyer.

2) Homogeneity of product: Under perfect competition it is assumed that all the firms are producing a product, which is 6) homogeneous. This means no product available in the market can be distinguished from one another both qualitatively and quantitatively. All the units supplied by the sellers would be of the same weight, same size, same colour, same taste etc. If in any case, the buyer feels certain difference in a product, the market cannot then be said to be perfect.

3) Free entry and free exit: In perfect competition, there should be free entry and free exit both for buyers and sellers. Because of this freedom, there will always be a large number of buyers and sellers in the market. Any restriction on the entry or exit may lead to certain monopoly thus competitive character of the market would end. This also helps to weed out inefficient utilization of the available resources.

4) Perfect knowledge of the market: All the sellers and buyers in the market should possess perfect knowledge about the market. Buyers should know the availability of products with the sellers and their prices. Similarly, sellers should also have knowledge about the total number of buyers, their demand and the prices they are willing to pay. Ignorance about the market may lead to some extraordinary situation affecting the perfect functioning of the market. This can result in fluctuations in prices, supplies of goods and services and demand for them. Establishment of a uniform price throughout the market is the essential condition of perfect competition.

5) Perfect mobility of factors of production: All the factors of production have freedom of movement i.e. there should be no obstacle in their mobility. This is essential for keeping elasticity of supply in the market and mutual competition among the sellers. A labourer must be free to move from one occupation to another. This is called as the occupational mobility of the labour. Geographical mobility of going from one place to another must be perfect. So far as land is concerned, it has occupational mobility and not geographical mobility. To bring land under other crop amounts to occupational mobility. In the same way, other factors of production should also enjoy the freedom of mobility.

6) Absence of transport costs: From the geographical point of view, the producers must be mutually close. This condition of proximity or nearness is also very important. If the producers were away, there would be expenditure on transport cost which would influence the price of product.

Thus, the market if fulfills all these six conditions can be called as the one in perfect competition.

2. Monopoly

Monopoly is an extreme form of market structure. The word monopoly is derived from two Greek words-Mono and Poly. Mono means single and Poly means 'seller'. Thus monopoly means single seller. Monopoly is a firm of market organization for a commodity in which there is only one single seller of the commodity. As monopoly is a form of imperfect market organization, there is no difference between firm and industry. A monopoly firm is said to be an industry. Thus monopoly means the absence of competition. There are strong barriers to entry into the industry. As a result, seller has full control over the supply of the commodity.

Features of Monopoly:

1) One seller and large number of buyers: Monopoly is a form of imperfect market structure where there is only one seller of a product. A monopoly firm may be owned by a person, a few numbers of of partners or a joint stock company. The characteristic feature of single seller eliminates the distinction between the firm and the industry. A monopolist firm is itself 'the industry. Under monopoly there are large numbers of buyers although the seller is one. No buyer's reaction can influence the price.

2) No close substitute: Under monopoly a single producer produces single commodities which have no close substitute. As the commodity in question has no close substitute, the monopolist is at liberty to change a price according to his own whimsy. Monopoly cannot exist when there is competition. A firm is said, to be monopolist only when it is the single producer and supplier of the product which have no close substitute. Under monopoly the cross elasticity of demand is zero. Cross elasticity of demand shows a change in the demand for a good as a result of change in the price of another good.

3) Strong barriers to the entry into the industry exist: In a monopoly market there is strong barrier on the entry of new firms. Monopolist faces no competition. As there is one firm no other rival producers can enter the market of the same product. Since the monopolist has absolute control over the production and sale of the commodity certain economic barriers are imposed on the entry of potential rivals. A monopoly might also face barriers to exiting a market. If government deems that the product provided by the monopoly is essential for well-being of the public, then the monopoly might be prevented from leaving the market.

4) Nature of demand curve: In case of monopoly one firm constitutes the whole industry. The entire demand of the consumers for a product goes to the monopolist. Since the demand curve of the individual consumers lopes downward, the monopolist faces a downward sloping demand curve.A monopolist can sell more of his output only at a lower price and can reduce the sale at a high price. The downward sloping demand curve expresses that the price (AR) goes on falling ns sales are increased. In monopoly AR curve slopes downward mid MR curve lies below AR curve. Demand curve under monopoly la otherwise known as average revenue curve.

5) Specialized Information: Monopoly characterized by control of Information or production is commonly technology not available to others. This specialized information often comes in the form of legally-established patents, copyrights, or trademarks. While these create legal barriers to entry they also indicate that information is not perfectly shared by all. In addition, a monopoly firm might know something or have a piece of information that is not available to others. This "something" may or may not be patented or copyrighted. It could be a secret recipe or formula. Perhaps it is a unique method of production.

6) Price maker: Monopolist is a price maker because he is not obliged to mind the policies and reactions of any rival. A pure, monopolist is one who can charge any price he likes by restricting his output.

7) Price discriminating power: The monopolist has power to charge different prices in different markets depending on the elasticity of demand for his product.

8) Informative selling costs: In monopoly, selling costs are incurred in the beginning. These are done to give information to the buyers about the product.

3. Monopolistic Competition

This is one form of imperfect competition where there are a fairly large number of sellers but products are differentiated.

Features of monopolistic competition:

1) It involves many sellers and buyers, but the number of dealers is not so large. They are unorganized.

2) The products are not homogeneous. They are differentiated by means of different labels attached to them. The products are close, although not exact substitutes.

3) There is no difficulty for a new firm to enter into or an existing firm to leave the industry. Each firm acts more or less independently.

4) Either in ignorance or on account of transport costs or lack of mobility of the factors of production, same price does not rule in the market throughout.

Imperfect Competition: When there is no perfect competition in the market, there exists an imperfect competition. In Imperfect competition, the number of sellers in the market is small and buyers are also in few numbers. The different forms of imperfect competition are monopolistic competition, monopoly, oligopoly and duopoly.

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Monopolistic competition is a type of market structure characterized by the presence of many sellers offering similar but not identical products. It blends elements of both perfect competition and monopoly, creating a competitive yet differentiated market environment.

Key Characteristics of Monopolistic Competition

1. Many Sellers:

A large number of small to medium-sized firms operate in the market.

Each firm has a relatively small market share.

2. Product Differentiation:

Firms offer products that are similar but differentiated through branding, quality, features, or packaging.

Differentiation allows firms to have some control over pricing.

3. Free Entry and Exit:

Firms can enter or leave the market relatively easily, leading to normal profits in the long run.

4. Non-Price Competition:

Firms compete on factors other than price, such as advertising, customer service, and product features.

5. Independent Decision-Making:

Each firm makes decisions independently without significant influence from competitors.

6. Downward-Sloping Demand Curve:

Firms face a demand curve that slopes downward because of product differentiation, meaning they can raise prices without losing all customers.

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Examples of Monopolistic Competition

1. Restaurants: Each restaurant offers unique dishes, ambiance, or service, distinguishing it from others.

2. Clothing Brands: Brands like Nike, Adidas, and local designers compete by differentiating their products through style and quality.

3. Hair Salons: They compete on service quality, location, or additional perks like spa treatments.

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Advantages of Monopolistic Competition

1. Variety for Consumers: Product differentiation provides consumers with a wide range of choices.

2. Innovation: Firms invest in innovation to stand out from competitors.

3. Competition Benefits: Competitive pressures encourage firms to improve quality and service.

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Disadvantages of Monopolistic Competition

1. Inefficiency:

Allocative Inefficiency: Prices are higher than marginal costs, leading to under-consumption.

Productive Inefficiency: Firms do not produce at the lowest possible cost due to excess capacity.

2. High Advertising Costs: Heavy reliance on advertising can lead to increased production costs, which may be passed on to consumers.

3. Short-Term Profits Only: In the long run, free entry and exit erode abnormal profits, leaving firms with only normal profits.

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Short-Run and Long-Run Outcomes

Short Run:

Firms may earn supernormal profits if they can successfully differentiate their products and attract customers.

Long Run:

New firms enter the market, increasing competition and reducing profits to normal levels as demand for individual firms' products decreases.

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Graphical Representation

1. Short-Run: Firms can earn profits or incur losses based on their cost structure and market demand.

2. Long-Run: The entry of new firms shifts the demand curve leftward, leading to normal profits where price equals average cost (AC).

Monopolistic competition is a common market structure in real-world economies, balancing competition and differentiation to meet diverse consumer preferences.