Determinants of the market structure
Market Structure Determinants
How different industries are classified and differentiated based on their degree and nature
of competition for services and goods.
What is the 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 Structure
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.
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.
4. Monopoly
a monopoly market, a single company represents the whole industry. It has no competitor,
and it is the sole seller of products in the entire market. This type of market is characterized
by factors such as the sole claim to ownership of resources, patent and copyright, licenses
issued by the government, or high initial setup costs.
All the above characteristics associated with monopoly restrict other companies from
entering the market. The company, therefore, remains a single seller because it has the
power to control the market and set prices for its goods.
