Determinants of market structure

A market

A market is a specific physical location where commodities and services are exchanged through open competition by selling and buying, so that one price for a commodity prevails throughout the area. A thorough description of the market is supplied in economics as a complete area where parties participating in the purchasing and selling of things are spread. This term is related to the sale and purchase of goods through the use of agents and brokers, who disperse the buyers and sellers over a wide area. Transactions for buying and selling are transmitted by phones, telegrams, the internet, and other popular platforms (Chand, 2014). Despite the variations, the cost price of a commodity remains the same throughout the entire market. So the term market is not necessarily referring to a place but merchandise and the competing buyers and sellers.

A market structure

A market structure is organizational or competitive characteristic of a market. These attributes describe pricing policy and the competitive nature of a particular market. It gives more details of number of firms producing similar goods and services and their structure based on the nature of competition prevailing in the specific market.

Determinants of market structure

1. Among the determinants of market structure is number and nature of sellers. They vary from more significant number of sellers to a single in a monopoly market.

2. Nature and number of buyers: a market with a single buyer is called a monopsony market. This kind of a market exists in a situation where one large employer employs local labor. For two buyers collaborating in a market is called a duopsony market. For many organized buyers it’s referred as oligopsony. It is common in cash crop farming such as tea, sugarcane, rice and other where local factories buy the entire harvest for processing (“What is Market Structure? definition and meaning - Business Jargons,” 2015).

3. Nature of the product: The properties of a product determine the structure of the market like in cases where it is differentiated; the commodities are close substitutes making the market to be characterized by monopolistic competition. If there is no product differentiation, perfect competition market is observed. For products that are entirely different from each other, it means no close substitutes are making the market a monopoly.

4. Entry and Exit rules: The entry and exit from the market depend on the profitability or loss caused by a firm in the market. More profits attract companies to join the market whereas losses results to exit of firms that cannot keep up with the competition. Perfect competition characterizes free entry and exit from the market. Monopoly bars entry of any firm to the market. A setup that is common in delivering public utility services such as power and water supply, postal, and transport services. In oligopoly markets, entry is barred due to cartels, collusion, tacit agreements and others. A situation where we have free entry and exit of new firms is a monopolistic completion. This condition is possible since the products in the market are differentiated.

5. Economies of scale: Firms which achieve vast economies of scale proliferate than other firms in the industry. They can compete with an added advantage leaving few firms to fight each other for survival. This situation is an oligopoly market. On the other hand, if one firm achieves large economies such that it eliminates all competitors and it can meet total market demands, a monopoly market is attained.

Forms of market structure

Based on competition in the market, a market can be categorized into monopoly market, perfect competition market, oligopoly market, monopolistic competition market, and duopoly market.

Perfect competition market

This is a type of market which involves several sellers and buyers exist. All of the buyers and sellers can exchange homogenous commodities at one prevailing price in the market. There is exists no rival competition between involved parties.

Features of perfect competition

Perfect competition market is characterized by large numbers of buyers and sellers. Since they are so many, a single buyer or seller cannot influence the price as well as the output of that industry. They are too small compared to the entire market.

Product homogeneity is another essential feature of this market. The competing firms provide homogenous goods and services. This situation makes the buyers not to have any preference for a particular seller since they all sell the same product. The variation in price is what brings a change in the demand. Customers will buy from a seller who is cheaper than others. Examples of these products are salt, wheat coal, etc. (“Four Types of Market Structures - Quickonomics,” 2016).

This market allows free entry and exit in the industry. Firms incurring massive losses due to stiff competition can leave and start its operations in any other industry. The mobility of sellers is not restricted.

Buyers and sellers have complete knowledge of the market conditions like prices and technology used to generate them. This knowledge gives them an opportunity to buy and sell anywhere and anytime they wish. In this market, no transportation costs are incurred in moving goods from a market to another. This measure is important in maintaining homogenous price as transportation charges when added to the price of the products will bring about variations. In this market, the prices are determined by the shifts in demand and supply. No government or large producer intervenes or control the prices.

Industry characterizing perfect competition market

The requirements of perfect competition market rarely exist in one industry. These requirements make this market unrealistic. Most products are differentiated in some level. Take for example bottled water. Producers vary the packaging, brands, and methods of purification. These variations make the product homogeneity quality hard to achieve. This obstacle and other tend to prevent this type of market. However, the agricultural industry produces goods that are homogenous and have no differentiation. A product like corn is similar regardless of the location. The buyers are usually aware of their price and demand shifts (Gallant, 2005). The industry is also free to enter and exit.

Monopolistic competition

This market has many firms that produce differentiated commodities that are close substitutes for each other. The products are similar but not identical. They compete on other factors rather than price.

Features of monopolistic competition

The primary feature of this market is product differentiation. The products are slightly different but substitute for each other. This market involves a large number of firms engaging in stiff competition since the products are differentiated. Monopolistic competition allows free entry and exit of firms in case they can’t keep up with the competition.

However, in this market, firms have some controls on product prices. They can raise it or lower it, and the buyers will respond accordingly. Due to the high competition, firms spend vast amounts on advertisements and other sales promotion strategies. Firms are also allowed to adjust the products to meet customers demand, and this result in nonhomogeneity of the products

Industry characterizing monopolistic competition

The toothpaste industry is a form of monopolistic competition market. It is characterized by a large number of sellers, differentiated commodities, several close substitutes and entry and exit from the industry. With many firms in the industry, there exist several brands of toothpaste like Sensodyne, crest, close up, Aquafresh and many others. These firms produce similar but slightly different item. The difference is flavors, names, texture, and packaging. To cope up with competition, firms utilize advertisements. And claiming superiority in quality (Hui, 2013)

Monopoly market

This is a market with only one seller. The one firm sells unique commodity with restriction of new firms.

Features of monopoly

The single firm controls the supply of the product fully. This control makes the elasticity of demand zero. The firm itself is the industry since it’s the only firm. The firm is the price maker, not taker as in the perfect competition market. Entry of new firms is barred in the industry, and there exist no close substitutes for the products in monopoly.

Industry characterized by monopoly

American Tobacco Company has maintained control since late 19th to the early 20th century. They singularly determined the prices (price maker) and the entry to the market were restricted.

Oligopoly market

This market has few sellers who sell homogenous or differentiated goods. It falls between monopoly and monopolistic competition markets. Some sellers dominate and control the price of products. In this market, firms can produce homogenous (pure oligopoly) and heterogeneous commodities (differentiated oligopoly).

Features of oligopoly

This market has few sellers and many buyers. Since there are few firms, they are interdependent on one another. Change in the price done by one firm affects the others, and they thus have to comply and adjust themselves to cope up with the competition. Due to the competition, every firm advertises their products frequently to reach out more customers. Firms can freely exit the industry but face some barriers while entering. These restrictions include government license, high capital requirement, Patent rules, the sophisticated technology required and others. The firms are also not uniform regarding size.

Industry characterized by Oligopoly market

Oligopoly is standard in operating systems for phones and computers. Android dominates smartphones for Google and iOS for Apple. For computers, the dominating operating systems are windows and Mac for Apple computers. In both cases, price changes done by one firm prompts the other to comply to compete and survive in the industry. Also, entry and exit to the industry is allowed thus the emergence of different operating systems like windows phone, Firefox OS, and Linux

References

Chand, S. (2014, March 3). Market Structure: Meaning, Characteristics and Forms | Economics. Retrieved from http://www.yourarticlelibrary.com/economics/market/market-structure-meaning-characteristics-and-forms-economics/28736

Gallant, C. (2005, October 12). Does perfect competition exist in the real world? Retrieved from https://www.investopedia.com/ask/answers/05/perfectcompetition.asp

Hui, J. T. (2013, July 9). Monopolistic Competition [Web log post]. Retrieved from http://tayloreconexplorer.blogspot.co.ke/2013/07/monopolistic-competiton.html

The Four Types of Market Structures - Quickonomics. (2016, September 6). Retrieved from https://quickonomics.com/market-structures/

What is Market Structure? Definition and meaning - Business Jargons. (2015, December 8). Retrieved from http://businessjargons.com/market-structure.html