Market Structures

12 Key excerpts on "Market Structures"

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  Economics

  Theory and Practice

  • Patrick J. Welch, Gerry F. Welch(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  In an antitrust case, the accused will likely present one definition of its market’s boundaries, and the accuser another. The court must then determine which definition is correct and, partly on that basis, decide on the guilt or innocence of the accused. THE Market Structures We know that the degree of competition that a business faces in a market influences its behavior with regard to the prices it charges, the profit it makes, and the nonprice competition it uses. Economists have created four models of market situations, called Market Structures, to represent degrees of competition and study their effects: pure competition, monopolistic competition, oligopoly, and monopoly. The four Market Structures represent a spectrum of competitive conditions. At one end of the spectrum is pure competition, where the competitive pressure is the strongest, and at the other end is monopoly, where there is no direct competition. In between are monopolistic competition, which is closer to pure competition, and oli- gopoly, which is closer to monopoly. Each of these market models has a set of characteristics that differentiates it from the other market models and is important for determining the type and amount of competition a firm faces. For example, certain features are associated with a monopoly structure and others with oligopoly. The distinguishing characteristics of each of the market models center around three areas. ♦ Number of sellers. The number of sellers in the market is important to the amount of competition. A market may have one seller, thousands of sellers, or some number in between. ♦ Product type. The product sold in the market can be identical from seller to seller or be differentiated. If a firm can distinguish its product from those of its competitors through size, color, or any other attribute, then nonprice competition can arise. ♦ Entry and exit. The ease or difficulty with which firms can enter or leave the market affects competition.

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  Corporate Finance

  Economic Foundations and Financial Modeling

  • Michelle R. Clayman, Martin S. Fridson, George H. Troughton, Michelle R. Clayman, Martin S. Fridson, George H. Troughton(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  18. SUMMARY In this chapter, we have surveyed how economists classify Market Structures. We have analyzed the distinctions between the different structures that are important for understanding demand and supply relations, optimal price and output, and the factors affecting long-run profitability. We also provided guidelines for identifying market structure in practice. Among our conclusions are the following: • Economic Market Structures can be grouped into four categories: perfect competition, monopolistic competition, oligopoly, and monopoly. • The categories differ because of the following characteristics: The number of producers is many in perfect and monopolistic competition, few in oligopoly, and one in monopoly. The degree of product differentiation, the pricing power of the producer, the barriers to entry of new producers, and the level of non-price competition (e.g., advertising) are all low in perfect competition, moderate in monopolistic competition, high in oligopoly, and generally highest in monopoly. • A financial analyst must understand the characteristics of Market Structures in order to better forecast a firm’s future profit stream. • The optimal marginal revenue equals marginal cost. However, only in perfect competition does the marginal revenue equal price. In the remaining structures, price generally exceeds marginal revenue because a firm can sell more units only by reducing the per unit price. • The quantity sold is highest in perfect competition. The price in perfect competition is usually lowest, but this depends on factors such as demand elasticity and increasing returns to scale (which may reduce the producer’s marginal cost). Monopolists, oligopolists, and producers in monopolistic competition attempt to differentiate their products so that they can charge higher prices. • Typically, monopolists sell a smaller quantity at a higher price.

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  Business Economics

  • Rob Dransfield(Author)
  • 2013(Publication Date)
  • Taylor & Francis

    (Publisher)

  Chapter 2 we saw that economists use models to simplify the relationship between economic variables to aid understanding. In this chapter we present some models of different Market Structures.

  5.2  What is market structure?

  Market structure means the characteristics under which a market operates. An understanding of market structure is very important in business because it helps to identify the nature of competition in the market. Knowledge of market structure helps entrepreneurs to consider the nature and scale of competition. The more competitive the market the greater the influence of rivals/competitors on pricing and other competitive decisions that a business makes.

  Market structure consists of four main elements:

  • How easy is it for new firms to enter the market or for existing firms to leave?
  • The number of buyers and sellers.
  • The types of goods and services sold in the market.
  • How price is determined in the market.

  Extreme Market Structures

  It is possible to identify two extreme Market Structures. At one extreme is a situation where the market is controlled by one supplier. This is referred to as a monopoly. For example, pharmaceutical companies such as GlaxoSmithKline can apply for a patent to produce a newly researched medicine or drug for a given period of time during which they would be the sole supplier.

  At the other extreme there are competitive markets in which many sellers provide almost identical products, for example farmers producing sugar beet. However, even with agricultural products there is some differentiation in quality. For example, hens’ eggs come in different sizes and colours, and some are produced by intensive farming whereas others are free range (see Figure 5.1

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  Economics for Investment Decision Makers

  Micro, Macro, and International Economics

  • Christopher D. Piros, Jerald E. Pinto(Authors)
  • 2013(Publication Date)
  • Wiley

    (Publisher)

  2. ANALYSIS OF Market Structures Traditionally, economists classify a market into one of four structures: perfect competition, monopolistic competition, oligopoly, and monopoly. Section 2.1 explains that four-way classification in more detail. Section 2.2 completes the introduction by providing and explaining the major points to evaluate in determining the structure to which a market belongs. 2.1. Economists’ Four Types of Structure Economists define a market as a group of buyers and sellers that are aware of each other and are able to agree on a price for the exchange of goods and services. Although the Internet has extended a number of markets worldwide, certain markets are limited by geographic boundaries. For example, the Internet search engine Google operates in a worldwide market. In contrast, the market for premixed cement is limited to the area within which a truck can deliver the mushy mix from the plant to a construction site before the compound becomes useless. Thomas L. Friedman’s international best seller The World Is Flat 1 challenges the concept of the geographic limitations of the market. If the service being provided by the seller can be digitized, its market expands worldwide. For example, a technician can scan your injury in a clinic in Switzerland. That radiographic image can be digitized and sent to a radiologist in India to be read. As a customer (i.e., patient), you may never know that part of the medical service provided to you was the result of a worldwide market. 1 Friedman (2006). 144 Economics for Investment Decision Makers Some markets are highly concentrated, with the majority of total sales coming from a small number of firms. For example, in the market for small consumer batteries, three firms controlled 87 percent of the U.S. market as of 2005 (Duracell 43 percent, Energizer 33 percent, and Rayovac 11 percent).

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  Introduction to Business Economics

  • (Author)
  • 2014(Publication Date)
  • Orange Apple

    (Publisher)

  ____________________ WORLD TECHNOLOGIES ____________________ Chapter- 8 Market Structure In economics, market structure (also known as the number of firms producing identical products.) • Monopolistic competition, also called competitive market, where there are a large number of firms, each having a small proportion of the market share and slightly differentiated products. • Oligopoly, in which a market is dominated by a small number of firms that together control the majority of the market share. • Duopoly, a special case of an oligopoly with two firms. • Oligopsony, a market, where many sellers can be present but meet only a few buyers. • Monopoly, where there is only one provider of a product or service. • Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms. • Monopsony, when there is only one buyer in a market. • Perfect competition is a theoretical market structure that features unlimited contestability (or no barriers to entry), an unlimited number of producers and consumers, and a perfectly elastic demand curve. The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate the market conditions. The elements of Market Structure include the number and size distribution of firms, entry conditions, and the extent of differentiation. These somewhat abstract concerns tend to determine some but not all details of a specific concrete market system where buyers and sellers actually meet and commit to trade.

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  Managerial Decision Making

  • J. Bridge, J. C. Dodds(Authors)
  • 2018(Publication Date)
  • Taylor & Francis

    (Publisher)

  We can in the first instance classify the different Market Structures firms are likely to encounter. The usual approach is to view the market structure as a continuum with perfect competition and monopoly at the two extremes. In between these two poles lie various shades of competitive and monopolistic markets. Generally in economics only four structures are taken as representative models though it is recognised that these only represent sufficiently different structures to form a basis for examining the behaviour of firms.

  The four Market Structures recognised are:

  • Perfect Competition.
  • Monopolistic Competition.
  • Oligopoly – pure and imperfect.
  • Monopoly.

  In this section we begin with an examination of the two extremes, and in passing give brief mention to monopolistic competition, but our prime concern will be with oligopoly. We justify this emphasis because in the first place oligopoly is by far the most significant variety in terms of industrial output and secondly it is the one where determinate models are difficult to formulate on account of the interdependence which confronts oligopolists in decision making.

  Perfect Competition

  The perfect competition model contains some very restrictive assumptions which will never be satisfied in real life. Historically, however, the model did have some empirical validity and one can also use the perfect competition model to show the link between the firm and the market and it is therefore a useful paradigm. Assumptions made for perfect competition to hold are:

  1. Many sellers and buyers:

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  Introduction to Air Transport Economics

  From Theory to Applications

  • Bijan Vasigh(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  8 Market Structure-Competitive and Monopolistic Markets

  My grandfather once told me that there are two kinds of people: those who work and those who take the credit. He told me to try to be in the first group; there was less competition there. Indira Gndhi

  Chapters 8 and 9 deal with market structure. Market structure refers to the competitive environment that surrounds the firm. it generally can be described in terms such as barriers to entry, numbers of buyers and sellers competing in the market, the individual seller’s control over price, extent of product substitutability, and the degree of mutual interdependence between firms. Market structure determines the type of competition that is found in the industry. The topics covered in this chapter are as follows:

  • Perfect competition, including:
    • − Conditions of perfect competition
    • − Perfect competition in the short run
    • − Perfect competition in the long run
  • Monopoly, including:
    • − Legal and government barriers
    • − Capital requirements
    • − Technology
    • − Natural barriers
    • − Labor unions
    • − Airports
  • Price/output decision for monopolies
  • Monopoly pricing and consumer well-being
  • Market structure in the aviation industry
    • − Aircraft manufacturing
    • − Jet engine manufacturing.

  Table 8.1 depicts the market continuum, and displays the four principal Market Structures. Perfect competition occurs when there are many buyers and sellers who have very little or no control over price. At the other extreme of the continuum are monopolies. Here, the market contains only one seller who has almost complete control over the output or price. These two Market Structures are the focus of this chapter. Monopolistic competition and oligopolies, otherwise known as hybrid Market Structures, are the focus of chapter 9 .

  Table 8.1 Market continuum

  Perfect Competition

  A perfectly competitive industry is one in which there are a large number of small buyers and sellers who can enter and exit the industry with no restrictions. This creates a situation in which the individual firm has little or no power over the price of their good. The price is dictated by the market, and this makes the individual firms price-takers. on this basis, each firm has a simple decision: to sell at the market-bearing rate or not to sell at all.

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  Microeconomic Principles and Problems

  A Pluralist Introduction

  • Geoffrey Schneider(Author)
  • 2024(Publication Date)
  • Routledge

    (Publisher)

  PART IV Market Structures and corporations DOI: 10.4324/9781003368441-15 Now that we have described how markets work along with the supply and demand model, the next step in understanding markets is to analyze the different Market Structures that we find in capitalist economies. Chapter 12 introduces the four main types of Market Structures—perfect competition, monopolistic competition, oligopoly, and monopoly. Each market structure has its own dynamics and characteristics, with different kinds of competition, barriers to entry, and product differentiation. Once we can identify which market structure a particular industry fits into, that helps us to anticipate the dynamics of that industry and how firms in it will behave in response to various factors. Chapter 13 on firm costs of production develops the mainstream microeconomic model of short-run and long-run costs. We can use the laws of specialization and diminishing returns, highlighted earlier, to derive U-shaped average cost curves in the short run and long run. The shape of long-run cost curves is driven by economies and diseconomies of scale that determine the number and size of competitors. The chapter concludes with an alternative perspective on the nature of firm costs based on political economy theories. Chapter 14 develops the mainstream model of profit maximization in perfectly competitive industries. This is the perfect Smithian market structure that needs little or no regulation due to the degree of competition. The chapter lays out the assumptions behind the model, short-run profit maximization, and long-run profit maximization. The long-term model of perfect competition, where entry and exit causes firms to produce at the minimum average total cost, is discussed in relation to Adam Smith’s ideas on capitalism

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  Economics For Today

  • Tucker, Irvin Tucker(Authors)
  • 2016(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  ............................................................................................................................................................................................. ............................................................................................................................................................................................... ................................................................................................................................................................................................................. 10-1 THE MONOPOLISTIC COMPETITION MARKET STRUCTURE Economists define monopolistic competition as a market structure characterized by (1) many small sellers, (2) a differentiated product, and (3) easy market entry and exit. Monopolistic competition fits numerous real-world industries. The following is a brief explanation of each characteristic. 10-1a CHARACTERISTICS OF MONOPOLISTIC COMPETITION Many Small Sellers Under monopolistic competition, as under perfect competi-tion, the exact number of firms cannot be stated. But in monopolistic competition, the number of sellers is smaller than in perfect competition. In this market struc-ture, consumers have many different varieties of products from which to choose, and prices are competitive. No single seller has a large enough share of the market to control prices. Ivan ’ s Oyster Bar, described in the chapter preview, is an example of a monopolistic competitor. Ivan assumes that his restaurant can set prices slightly higher or improve service independently without fear that competitors will react by changing their prices or giving better service. Thus, if any single seafood restaurant raises its price, the going market price for seafood dinners increases by a very small amount.

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  The Economics of Alfred Marshall (Routledge Revivals)

  • David Reisman(Author)
  • 2013(Publication Date)
  • Routledge

    (Publisher)

  2 and that there is more merit in being fuzzily right than in being precisely wrong. In his ambiguous and open-ended way he seems to have treated all four of the principal Market Structures that figure in contemporary economics textbooks, and it is with these four Market Structures that we shall be concerned in the four sections of the present chapter.

  6.1 PERFECT COMPETITION

  The theoretical analysis of perfect competition, Stigler says, was long treated ‘with the kindly casualness with which one treats of the intuitively obvious’: ‘It is a remarkable fact that the concept of competition did not begin to receive explicit and systematic attention in the main stream of economics until 1871.’1 Economics rapidly made up for lost time and extensive definitions may be found in books such as Jevons' Theory of Political Economy (1871) and Edgeworth's Mathematical Psychics (1881).2 Marshall's own definition is as follows: ‘A perfect market is a district, small or large, in which there are many buyers and many sellers all so keenly on the alert and so well acquainted with one another's affairs that the price of a commodity is always practically the same for the whole of the district.’3 In such a market, ‘buyers generally compete freely with buyers, and sellers compete freely with sellers’,4 and the outcome of such ‘free competition’ is precisely what we would anticipate: there is ‘only one price on the market at one and the same time’ and no dealer is driven to ‘taking a lower or paying a higher price than others are doing’.5 Always assuming, of course, that four conditions implicit in the definition of the perfect market are satisfied.

  First , product homogeneity. We must assume that ‘the commodities referred to are always of the same quality’.6 This is the case, for example, with ‘raw produce’ (including the ubiquitous fresh fish), and also with some manufactured outputs - as where the goods in question are ‘so simple and uniform’, so ‘plain and common’, that their production ‘can be reduced to routine’ and their distribution can be ‘wholesale in vast quantities’ (goods like, say, ‘steel rails and calico’ which are available at a multiplicity of different outlets).7 Homogeneity in the sense of the economist must not, however, be confused with homogeneity in the sense of the physicist, as Marshall reflected in an important footnote on the subjective and the objective which occurs in his fragmentary Essay on Value and which reads as follows: ‘Inequalities of price are indeed often more apparent than real. A man who pays four shillings for a pair of gloves which he knows he could have bought in the next street for three, pays three shillings for the gloves and expends the fourth on love of display, on indulgence of old associations, or saving of time. He buys something extra just as much as if the gloves had had extra fancy work upon them.’8

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  Quantitative Techniques for Competition and Antitrust Analysis

  • Peter Davis, Eliana Garcés, Eliana Garces-Tolon(Authors)
  • 2009(Publication Date)
  • Princeton University Press

    (Publisher)

  1

  5.1.1 Theoretical Predictions about the Effect of Structure on Prices

  Many economic models of competition can be embedded into this general two-stage structure and each will predict a relationship between market structure and market prices. We will establish the result for three important cases, namely the models in which firms are (1) price-takers, (2) oligopolists competing in prices, and (3) oligopolists competing in quantities. By examining these three canonical cases we are able to examine the mechanisms by which market structure can affect equilibrium prices. For example, we will see that, generally, a merger between two firms producing substitutes will tend to result in higher prices. Such results form the theoretical backbone of the investigations of the unilateral and multilateral effects of mergers.

  5.1.1.1 Market Structure among Price-Taking Firms

  The structure of market supply can be important for economic efficiency in a price-taking environment since where production takes place will usually matter for the aggregate costs incurred to produce any given level of output. That is, the number of firms that are producing will usually have an effect on the total costs of production. That in turn matters because the pricing pressures that firms face are determined by the intersection of market demand and market supply, which in a price-taking environment is determined by the industry’s marginal costs of production. A reduction in the number of firms will, except in special circumstances, reduce the aggregate supply to the market and hence induce the price to rise. Higher prices in turn induce increases in supply from at least one remaining active firm that, if it suffers from diseconomies of scale, will nonetheless find it profitable to produce extra output despite higher unit costs. Because of the potential diseconomies of scale, a lower number of firms may result in higher prices required to sustain a given level of aggregate output. Generally therefore, assuming a price-sensitive demand and firm-level diseconomies of scale, an equilibrium involving a reduced set of firms will involve lower quantities and higher prices.

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  Microeconomics for MBAs

  The Economic Way of Thinking for Managers

  • Richard B. McKenzie, Dwight R. Lee(Authors)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  Thus our conclusions regarding the pricing and production behav-ior of firms in monopolistically competitive and oligopolistic markets are tentative at best. 8 Economists seeking to make solid, empirically verifiable predictions about market behavior rely almost exclusively on supply and demand and monopoly models. Although predictions based on those models may sometimes be wrong, they tend to be easier to use and may be more reliable than predictions based on models of imperfect competi-tion. Predictions aside, it is important to remember that most markets are imperfect. 9 The competitiveness of the capital market – including the market for entire firms – will act as a discipline on managers who might believe that they can take advantage of their discretionary authority. Capital markets also induce managers to find the most cost- effective methods of production. 10 The “law of unintended consequences” rules. People concerned with containing the ravages of pedophilia on children understandably want to control the difficult-to- understand and maybe perverse ways of pedophiles, but controls on hugging (and other forms of human touch available to children, especially to disadvantaged and emotionally deprived children) can themselves result in damage to millions, if not tens of millions, of children pedophiles never touch. Needless to say, economic analysis leads again to a need for carefully crafted balance in regulatory policies.

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