Market structure is defined as the competitive environment where the sellers of a certain product meet the buyers. The market will consist of the potential buyers plus the sellers of a certain product. The process in which the prices of the commodity and output are dictated by the actual world is considerably affected by the market structure (Salvator, 2011). The market can be competitive by having small businesses that generate very little amount of the total sales of the market. On the other hand, there could be few large businesses by the amount of sales in the total market. The actual size of the market could be measured in two major ways. First, by the volume or the total number of units sold. Second, by value, that is, the amount of money spent on the services and goods that are sold.
The different markets may be categorized in various market structures; hence, the competition level describes each market structure. There are generally four main types of the market structure, which are oligopoly, monopoly, perfect competition and monopolistic competition. They are defined according to the size and the number of buyers and sellers of a product, the type of the product, the ease of market entry and exit for the owners and the firms, and the level of knowledge that economic agents have on the costs and prices, as well as the supply and demand conditions. Monopolistic competition, oligopoly, and monopoly all represent types of imperfect competition.
This paper will examine these characteristics of the market structure in details.
This is the type of market organization with many sellers and buyers of a certain product, where each participant is so small that it cannot affect the product’s price, providing the product is homogeneous. The mobility of the resources is perfect and economic agents, such as consumers and input suppliers, have a good knowledge of market conditions. This competition has never existed and maybe the closest we can get is the stock market. Other markets that are close to this type of market are those of the agricultural goods like corn and wheat, natural gas and trucking industries (Salvator, 2011). However, even if it does not happen, a theory should be either accepted or rejected depending on its ability to predict and explain correctly its assumptions.
The price in the perfect competition is determined at intersection of the demand curve and supply curve of a certain product in the market. The demand curve of a particular product is the horizontal summation of the demand curve of buyers, while the supply curve is the horizontal summation of the supply curve of producers of a certain product. Therefore, a perfectly competitive firm is actually a price taker, that is, the one that takes the price of the given product and cannot exert perceptible influence on it by trying to vary the output level or sales of that particular product. The fact that the products of the perfectly competitive firms are homogeneous, the firm’s owners are not able to sell their products at a higher price as they would lose customers, who would buy the product elsewhere. There is also no reason for the company to sell at a lower than the market price. If this happens, the company would face horizontal demand curve for the product at the determined market price at the intersection of the supply and demand curves of the product.
This is a type of market organization whereby one firm will sell a product that has no substitutes. Entering in such a monopolistic industry is impossible, because there is only one firm in it. Most of these firms are owned by the state, which is why they do not allow other players to enter, for example, Indian Railways (Sen, 2011). Monopolists earn profits because the entry of other firms to the industry is blocked. This means that monopoly is the opposite of the perfect competition in the market.
The four reasons that can lead to monopoly are:
- The firm could control supply of all the raw materials used to make the product. For example, Alcoa, a company in America, controlled almost all sources of bauxite, a raw material used in aluminum production. Therefore, they enjoyed monopoly on aluminum production in the United States.
- A firm could own a copyright or patent that eliminates other firms using a certain process of production or even producing certain products. The patents are issued by the government for a period of seventeen years, like an incentive to the inventors. For example, Polaroid was given patent on instant cameras, while Xerox was offered monopoly on copying machines. Again, by the time cellophane was introduced, DuPont had been a monopoly.
- Certain industries may develop economies of scale such that the average cost may fall due to a large output range, leaving only one firm to supply the entire market. As a result, the firm is said to enjoy a natural monopoly. An example is the public utility companies, such as gas, electricity, and local transport firms. It is not good to have more than one such company in the market, as this would lead to supply lines duplication, as well as high costs in every unit. Local governments try to avoid this by giving the chance to a single firm operating in the market to regulate the prices of goods and services provided. Local authorities also make sure that the firm gets a sufficient return on investment.
- The government franchise may establish a monopoly. The firm could be set up to be the only producer and supplier of a service or good, but it is still regulated by the government. For example, the post office is the only organization controlled by the government that offers the services of correspondence sending and delivery. The local government may also need the license to operate other businesses like taxis, liquor stores, medical offices, broadcasting corporations, or private healthcare clinics. The main aim is to ensure the minimum standards in competence are met. The local government also restricts a lot of competition and offers to the license owners the monopoly profits.
Now that the monopolist is the sole product seller, the product’s demand curve is negatively sloped, which means the monopolist could sell more products by lowering prices. As a result, marginal revenue becomes smaller as compared to product price.