Market structure

Market structure is best defined as the organisational and other characteristics of a market. We
focus on those characteristics which affect the nature of competition and pricing – but it is
important not to place too much emphasis simply on the market share of the existing firms in
an industry.

Traditionally, the most important features of market structure are:

1. The number of firms (including the scale and extent of foreign competition)

2. The market share of the largest firms (measured by the concentration ratio – see below)

3. The nature of costs (including the potential for firms to exploit economies of scale and also
the presence of sunk costs which affects market contestability in the long term)

4. The degree to which the industry is vertically integrated - vertical integration explains the
process by which different stages in production and distribution of a product are under the
ownership and control of a single enterprise. A good example of vertical integration is the oil
industry, where the major oil companies own the rights to extract from oilfields, they run a fleet
of tankers, operate refineries and have control of sales at their own filling stations.

4. The extent of product differentiation (which affects cross-price elasticity of demand)

5. The structure of buyers in the industry (including the possibility of monopsony power)

6. The turnover of customers (sometimes known as "market churn") – i.e. how many customers
are prepared to switch their supplier over a given time period when market conditions change.
The rate of customer churn is affected by the degree of consumer or brand loyalty and the
influence of persuasive advertising and marketing.

Monopoly

Understanding Monopolies

Monopolies typically have an unfair advantage over their competition since they
are either the only provider of a product or control most of the market share or
customers for their product. Although monopolies might differ from industry-to-
industry, they tend to share similar characteristics that include:
High or no barriers to entry: Competitors are not able to enter the market, and
the monopoly can easily prevent competition from developing their foothold in an
industry by acquiring the competition.

Single seller: There is only one seller in the market, meaning the company
becomes the same as the industry it serves.

Price maker: The company that operates the monopoly decides the price of the
product that it will sell without any competition keeping their prices in check. As a
result, monopolies can raise prices at will.

Economies of scale: A monopoly often can produce at a lower cost than smaller
companies. Monopolies can buy huge quantities of inventory, for example, usually
a volume discount. As a result, a monopoly can lower its prices so much that
smaller competitors can't survive. Essentially, monopolies can engage in price
wars due to their scale of their manufacturing and distribution networks such as
warehousing and shipping, that can be done at lower costs than any of the
competitors in the industry.

Duopoly

What Is a Duopoly?

A duopoly is a situation where two companies own all, or nearly all, of the market
for a given product or service. A duopoly is the most basic form of oligopoly, a
market dominated by a small number of companies. A duopoly can have the same
impact on the market as a monopoly if the two players collude on prices or
output. Collusion results in consumers paying higher prices than they would in a
truly competitive market, and it is illegal under U.S. Antitrust law.

A duopoly is a form of oligopoly, where only two companies dominate the market.
Monopolies, oligopolies, and collusion are all examples of duopolies.Visa and
Mastercard are a duopoly that dominates the payments industry in Europe and
the United States.
Oligopoly

What is an Oligopoly?

Oligopoly is a market structure with a small number of firms, none of which can
keep the others from having significant influence. The concentration ratio
measures the market share of the largest firms. A monopoly is one firm, duopoly
is two firms and oligopoly is two or more firms. There is no precise upper limit to
the number of firms in an oligopoly, but the number must be low enough that the
actions of one firm significantly influence the others.

Understanding Oligopoly

Oligopolies in history include steel manufacturers, oil companies, rail roads, tire
manufacturing, grocery store chains, and wireless carriers. The economic and legal
concern is that an oligopoly can block new entrants, slow innovation, and increase
prices, all of which harm consumers. Firms in an oligopoly set prices, whether
collectively – in a cartel – or under the leadership of one firm, rather than taking
prices from the market. Profit margins are thus higher than they would be in a
more competitive market.

Monopsony

A monopsony is a market condition in which there is only one buyer, the

monopsonist. Like a monopoly, a monopsony also has imperfect market
conditions. The difference between a monopoly and monopsony is primarily in the
difference between the controlling entities. A single buyer dominates a
monopsonized market while an individual seller controls a monopolized market.
Monosonists are common to areas where they supply most or all of the region's
jobs.

In a monopsony, a large buyer controls the market. Because of their unique

position, monopsonies have a wealth of power. For example, being the primary or
only supplier of jobs in an area, the monopsony has the power to set wages. In
addition, they have bargaining power as they are able to negotiate prices and
terms with their suppliers.
There are several scenarios where a monopsony can occur. Like a monopoly, a
monopsony also does not adhere to standard pricing from balancing supply-side
and demand-side factors. In a monopoly, where there are few suppliers, the
controlling entity can sell its product at a price of its choosing because buyers are
willing to pay its designated price. In a monopsony, the controlling body is a buyer.
This buyer may use its size advantage to obtain low prices because many sellers
vie for its business.

KEY TAKEAWAYS

A monopsony refers to a market dominated by a single buyer.

In a monopsony, a single buyer generally has a controlling advantage that drives

its consumption price levels down.

Monopsonies commonly experience low prices from wholesalers and an

advantage in paid wage

Pure competition

Pure competition is a term that describes a market that has a broad range of
competitors who are selling the same products. It is often referred to as perfect
competition. Here are some characteristics that define pure competition:

In an ideal purely competitive market, the products being sold would be identical,
which removes the option of one seller offering something different or better than
another seller.

Because there are so many competitors in the market offering the same product
at the same price, one competitor doesn't have an edge over the others.
Essentially, all the sellers are equal.

New companies can easily enter the market.

The price of products is determined solely by what consumers are willing to pay.
To further illustrate pure competition, let's imagine that you are purchasing
assorted color latex balloons. You go to your local party store where you find
several different brands of balloons available. There are five different brands of
10-inch assorted color balloons, and they are all priced at 99 cents per package.

Because you have no preference for one brand over another, and the packaging is
generic on each brand, you randomly select a package. Because there is not a
significant difference in latex balloons, and they are all the same size and price,
you are not concerned about which package you buy. They all are essentially the
same. In this example, the balloon manufacturers are operating under pure
competition because one company does not have an edge over another. Generic
products, like balloons, can illustrate pure competition. All the prices are equal,
and in the end, the balloons are the same.

Monopolistic competition

Monopolistic competition characterizes an industry in which many firms offer

products or services that are similar, but not perfect substitutes. Barriers to entry
and exit in a monopolistic competitive industry are low, and the decisions of any
one firm do not directly affect those of its competitors. Monopolistic competition
is closely related to the business strategy of brand differentiation.

Monopolistic competition occurs when an industry has many firms offering

products that are similar but not identical.

Unlike a monopoly, these firms have little power to set curtail supply or raise
prices to increase profits.

Firms in monopolistic competition typically try to differentiate their product in

order to achieve in order to capture above market returns.

Heavy advertising and marketing is common among firms.

Oligopsony
Oligopsony is similar to an oligopoly (few sellers), this is a market in which there
are only a few large buyers for a product or service. This allows the buyers to exert
a great deal of control over the sellers and can effectively drive down prices.

Monopscony vs. Oligopsony

By contrast, in situations where monopsonies occur, sellers often engage in price

wars to entice a single buyer's business, effectively driving down the price and
increasing the quantity. Getting caught in a monopscony is also known as "racing
to the bottom." It's a situation where sellers lose any power they previously had
over supply and demand.