When analysing a market, we first need to understand what we see as a market and which characteristics define a market structure. A market refers to buyers and sellers who through their association, both in reality and potentially build the cost of a good or service. A market structure could then be seen as the characteristics of a market that impact the behaviour and results of the organizations working in that market. Show
The main characteristics that determine a market structure are: the number of organizations in the market (selling and buying), their relative negotiation power in relation to the price setting, the degree of concentration among them; the level product of differentiation and uniqueness; and the entry and exit barriers in a particular market. So, the structure of the market affects how firm price and supply their goods and services, the entry and exit barriers, and how efficiently a seller carries out its business operations. A mix of the above-mentioned characteristics determine several market structures, from which we feature the most important ones: Perfect competitionAn efficient market where goods are produced using the most efficient techniques and the least number of factors. The market is characterized by the following aspects:
MonopolyRepresents the opposite of a perfect competition. This market is composed of a single seller who will therefore in full control to set the prices. OligopolyProducts are offered by a small number of sellers were actions of one firm significantly influence the others. Important characteristics are:
Monopolistic competitionThe market is formed by a high number of sellers with similar products or services, but differ due to differentiation, that will allow prices. Entry and exit barriers in a monopolistic competitive industry are low, and the decisions do not directly affect those of its competitors. Monopolistic competition is closely related to the business strategy of brand differentiation. Important characteristics are:
MonopsonyIt’s similar to a monopoly, but in this case, there are many sellers with only one buyer, the monopsonist, who will have full power whit price negotiations. Important characteristics are:
OligopsonyIt's similar to monopsony, but with a few buyers. Sellers will have to deal with the increased negotiating power of the oligopsonists. Oligopsony occurs when a few firms dominate the purchase of product or services. This means that the few buyers have considerable market power and therefore control over the sellers in driving down prices. This is “Monopolistic Competition, Oligopoly, and Monopoly”, section 1.5 from the book An Introduction to Business (v. 2.0). For details on it (including licensing), click here. For more information on the source of this book, or why it is available for free, please see the project's home page. You can browse or download additional books there. To download a .zip file containing this book to use offline, simply click here. Has this book helped you? Consider passing it on: Creative Commons supports free culture from music to education. Their licenses helped make this book available to you. DonorsChoose.org helps people like you help teachers fund their classroom projects, from art supplies to books to calculators. Learning Objective
Economists have identified four types of competition—perfect competition, monopolistic competition, oligopoly, and monopoly. Perfect competition was discussed in the last section; we’ll cover the remaining three types of competition here. Monopolistic CompetitionIn monopolistic competitionMarket in which many sellers supply differentiated products., we still have many sellers (as we had under perfect competition). Now, however, they don’t sell identical products. Instead, they sell differentiated products—products that differ somewhat, or are perceived to differ, even though they serve a similar purpose. Products can be differentiated in a number of ways, including quality, style, convenience, location, and brand name. Some people prefer Coke over Pepsi, even though the two products are quite similar. But what if there was a substantial price difference between the two? In that case, buyers could be persuaded to switch from one to the other. Thus, if Coke has a big promotional sale at a supermarket chain, some Pepsi drinkers might switch (at least temporarily). How is product differentiation accomplished? Sometimes, it’s simply geographical; you probably buy gasoline at the station closest to your home regardless of the brand. At other times, perceived differences between products are promoted by advertising designed to convince consumers that one product is different from another—and better than it. Regardless of customer loyalty to a product, however, if its price goes too high, the seller will lose business to a competitor. Under monopolistic competition, therefore, companies have only limited control over price. OligopolyOligopolyMarket in which a few sellers supply a large portion of all the products sold in the marketplace. means few sellers. In an oligopolistic market, each seller supplies a large portion of all the products sold in the marketplace. In addition, because the cost of starting a business in an oligopolistic industry is usually high, the number of firms entering it is low. Companies in oligopolistic industries include such large-scale enterprises as automobile companies and airlines. As large firms supplying a sizable portion of a market, these companies have some control over the prices they charge. But there’s a catch: because products are fairly similar, when one company lowers prices, others are often forced to follow suit to remain competitive. You see this practice all the time in the airline industry: When American Airlines announces a fare decrease, Continental, United Airlines, and others do likewise. When one automaker offers a special deal, its competitors usually come up with similar promotions. MonopolyIn terms of the number of sellers and degree of competition, monopolies lie at the opposite end of the spectrum from perfect competition. In perfect competition, there are many small companies, none of which can control prices; they simply accept the market price determined by supply and demand. In a monopolyMarket in which there is only one seller supplying products at regulated prices., however, there’s only one seller in the market. The market could be a geographical area, such as a city or a regional area, and doesn’t necessarily have to be an entire country. There are few monopolies in the United States because the government limits them. Most fall into one of two categories: natural and legal. Natural monopoliesMonopoly in which, because of the industry’s importance to society, one seller is permitted to supply products without competition. include public utilities, such as electricity and gas suppliers. Such enterprises require huge investments, and it would be inefficient to duplicate the products that they provide. They inhibit competition, but they’re legal because they’re important to society. In exchange for the right to conduct business without competition, they’re regulated. For instance, they can’t charge whatever prices they want, but they must adhere to government-controlled prices. As a rule, they’re required to serve all customers, even if doing so isn’t cost efficient. A legal monopolyMonopoly in which one seller supplies a product or technology to which it holds a patent. arises when a company receives a patent giving it exclusive use of an invented product or process. Patents are issued for a limited time, generally twenty years.United States Patent and Trademark Office, General Information Concerning Patents, April 15, 2006, http://www.uspto.gov/web/offices/pac/doc/general/index.html#laws (accessed January 21, 2012). During this period, other companies can’t use the invented product or process without permission from the patent holder. Patents allow companies a certain period to recover the heavy costs of researching and developing products and technologies. A classic example of a company that enjoyed a patent-based legal monopoly is Polaroid, which for years held exclusive ownership of instant-film technology.Mary Bellis, “Inventors-Edwin Land-Polaroid Photography-Instant Photography/Patents,” April 15, 2006, http://inventors.about.com/library/inventors/blpolaroid.htm (accessed January 21, 2012). Polaroid priced the product high enough to recoup, over time, the high cost of bringing it to market. Without competition, in other words, it enjoyed a monopolistic position in regard to pricing. Key Takeaways
ExerciseIdentify the four types of competition, explain the differences among them, and provide two examples of each. (Use examples different from those given in the text.) What is a market structure with a small number of businesses selling the same or similar products?3. Oligopoly. An oligopoly market consists of a small number of large companies that sell differentiated or identical products.
Is a market structure in which a large number of small businesses sell similar but not identical products at different prices?Monopolistic competition occurs when many companies offer products that are similar but not identical. Firms in monopolistic competition differentiate their products through pricing and marketing strategies.
Which market structure sells similar products?Like pure competition, monopolistic competition is a market structure referring to a large number of small firms competing against each other. However, firms in monopolistic competition sell similar but highly differentiated products.
What is a market structure in which a large number of firms all produce the same product?Perfect competition is a market structure in which a large number of firms all produce the same product.
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