RIFT VALLEY UNIVERSITY GULELLE CAMPUS

SECOND YEAR MBA STUDENTS GROUP ASSIGNMENT

COURSE: MANAGERIAL ECONOMICS (MBA 662)

REVIEW OF DIFFERENT TYPES OF MARKET STRUCTURE:

WHICH OF THEM IS APPLICABLE TO DEVELOPING
COUNTRIES?

SUBMITTED TO:

Terefe Abebe (PhD)

SUBMITTED BY:

Mekonnen Jaleta (ID No 0183/21)

Takele Regassa (ID No 0048/21)
Seyoum Hailu (ID No 0046/21)

NOVEMBER 2022

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 TABLE OF CONTENT
Title Page
1. EXECUTIVE SUMMARY................................................................................................3
2. CONCEPT OF MARKET STRUCTURE..................................................................5
3. HISTORY OF MARKET STRUCTURE...................................................................5
4. TYPES OF MARKET STRUCTURE.........................................................................6
5. FEATURES OF MARKET STRUCTURE.................................................................7
5.1. PERFECT COMPETITION..................................................................................7
5.2. MONOPOLY......................................................................................................... 8
5.3. MONOPOLISTIC COMPETITION......................................................................8
5.4. OLIGOPOLY......................................................................................................... 9
6. APPLICABLE MARKET STRUCTURE TO DEVELOPING COUNTRIES..........10
6.1. LITERATURE REVIEW.....................................................................................10
6.2. FINDINGS........................................................................................................... 12
7. CONCLUSION AND RECOMMENDATION.........................................................13
7.1. CONCLUSION.................................................................................................... 14
7.2. RECOMMENDATION........................................................................................14
8. Reference..........................................................................................................................15

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1. Executive summary

Market structure refers to the nature and degree of competition in the market for
goods and services. The structures of market both for goods market and service
(factor) market are determined by the nature of competition prevailing in a
particular market.

Market structure is the interconnected characteristics of a market, such as the

number and relative strength of buyers and sellers, degree of freedom in
determining the price, level and forms of competition, extent of product
differentiation and ease of entry into and exit from the market.

The four main types of market structure are perfect competition, monopoly,
monopolistic competition and oligopoly.

Perfect competition, refers to a type of market where there are many buyers and
seller that feature free barriers to entry, dealing with homogeneous products with
no differentiation, where the price is fixed by the market. Individual firms are
price taker as the price is set by the industry as a whole. Example: Agricultural
products which have many buyers and sellers, selling homogeneous goods where
the price is determined by the demand and supply of the market and not
individual firms.

A Monopoly is a market structure in which there is only one producer/seller for a

product. In other words, the single business is the industry. Entry into such a
market is restricted due to high costs or other impediments, which may be
economic, social or political.

Monopolistic competition is a type of imperfect competition where there are

many sellers, selling products that are closely related but differentiated from one
another (e.g. quality of products may differentiate) and hence they are not perfect
substitutes. This market structure exists when there are multiple sellers who
attempt to seem different from one another. Examples: toothpaste, soft drinks,
clothing as they all are homogeneous products with many buyers and sellers, no
to low entry barriers but are different from each other due to quality, taste,
branding. Firms have partial control over the price as they are not price takers

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(due to differentiated products) or Price Maker (as there are many buyers and
sellers)

An oligopoly is a market form in which a market or industry is dominated by a

small number of sellers (oligopolistic firms). Because there are few sellers, each
oligopolistic firm is likely to be aware of the actions of the others. The decisions
of one firm influence, and are influenced by, the decisions of other firms.

Market structures in developing countries arc of interest for a number of reasons.

Apart from the possibility that market structure may have an important impact on
the rate of economic growth market structure is of interest because it clearly
affects the distribution of income, a subject that is increasingly of interest among
those working on the problems of developing countries. It is also of interest
because economic theory has its widest applications when perfect competition
can be assumed. In fact, in absence of evidence to the contrary, something close
to perfect competition is nearly always assumed by planners in developing
countries.

As the review conducted in the study indicates, the market structure of

developing countries varies based on different commodities. Agricultural
products show characteristics closer to perfect completion, many industrial
products show characteristics monopolistic competition and few goods/service
like electricity and telecom services show characteristics of monopoly.

So as to ensure efficient resource allocation and social and economic welfare, the
review recommends that developing countries need to move closer to competitive
market in the long run. In short run, balanced government intervention and
market force is quite advisable.

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 2. Concept of Market Structure

According to Wikipedia, Market structure, in economics, depicts how firms are

differentiated and categorized based on the types of goods they sell
(homogeneous/heterogeneous) and how their operations are affected by external
factors and elements. Market structure makes it easier to understand the
characteristics of diverse markets.

The main body of the market is composed of suppliers and demanders. Both parties
are equal and indispensable. The market structure determines the price formation
method of the market. Suppliers and Demanders (sellers and buyers) will aim to find
a price that both parties can accept creating an equilibrium quantity.

Market definition is an important issue for regulators facing changes in market

structure, which needs to be determined. The relationship between buyers and sellers
as the main body of the market includes three situations: the relationship between
sellers (enterprises and enterprises), the relationship between buyers (enterprises or
consumers) and the relationship between buyers and sellers. The relationship
between the buyer and seller of the market and the buyer and seller entering the
market, are the market competition and monopoly relationships reflected in
economics.

3. History of Market Structure

Market structure has been a topic of discussion for many economists like Adam
Smith and Karl Marx who have strong conflicting viewpoints on how the market
operates in presence of political influence. Adam Smith in his writing on economics
stressed the importance of laissez-faire principles outlining the operation of the
market in the absence of dominant political mechanisms of control, while Karl Marx
discussed the working of the market in the presence of a controlled economy
sometimes referred to as a command economy in the literature. Both types of market
structure have been in historical evidence throughout the twentieth century and
twenty-first century.
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Market structure has been apparent throughout history due to its natural influence it
has on markets, this can be based on the different contributing factors that market up
each type of market structure.

4. Types of Market Structure

A variety of market structures will characterize an economy. Such market structures

essentially refer to the degree of competition in a market.

There are other determinants of market structures such as the nature of the goods and
products, the number of sellers, number of consumers, the nature of the product or
service, economies of scale etc. We will discuss the four basic types of market
structures in any economy.

One thing to remember is that not all these types of market structures actually exist.
Some of them are just theoretical concepts. But they help us understand the
principles behind the classification of market structures.

Economists usually classify market structures into four main types: perfect
competition, monopoly, monopolistic competition and oligopoly. These types of
market structure are different according to the following characteristics: number of
sellers, type of product, barriers to entry, power to affect price and the extent and
type of non-price competition. The following diagram depicts the four types of
market structure.

(Source: BusinessJargons)

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 5. Features of Market Structure

5.1. Perfect competition

Perfect Market is a market situation which consists of a very large number of buyers
and sellers offering a homogeneous product. Under such condition, no firm can
affect the market price. Price is determined through the market demand and supply of
the particular product, since no single buyer or seller has any control over the price.

Perfect Competition is built on two critical assumptions:

 The behaviour of an individual firm and

 The nature of the industry in which it operates

The firm is assumed to be a price taker and the industry is characterized by freedom
of entry and exit

Perfect Competition cannot be found in the real world. For such to exist, the
following conditions must be observed and required:

1. Many buyers and sellers: Each of these must buy or sell such a small
proportion of the total market output that none is able to have any influence
over the market price.
2. Homogeneous product: Each firm must be producing an identical product,
for example premium unleaded petrol or skimmed milk.
3. Free entry and exit from the market: This means that there are no barriers
to entry or exit that give incumbent firms an advantage over potential
competitors who are considering entering the industry. These barriers, which
can represent either demand or cost advantages, are explained in more detail
in the next section.
4. Perfect knowledge: Both firms and consumers must possess all relevant
market information regarding production and prices.
5. Zero transportation costs: This means that it does not cost anything for
firms to bring products to the market or for consumers to go to the market.

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Under the above conditions, firms in the market will be price-takers; there will be
one, and only one, market price, meaning that the product will sell at the same price
in all locations. Most treatments of perfect competition

5.2. Monopoly

In a monopoly type of market structure, there is only one seller, so a single firm will
control the entire market. It can set any price it wishes since it has all the market
power. Consumers do not have any alternative and must pay the price set by the
seller.

Monopolies are extremely undesirable. Here the consumers lose all their power and
market forces become irrelevant. However, a pure monopoly is very rare in reality.

The existence of Monopoly market structure depends on the following conditions:

1. There must be a lack of substitutes for the product. This means that any
existing products are not very close in terms of their perceived functions and
characteristics. Electricity is a good example.
2. There must be barriers to entry or exit. These are important in the long run
in order to prevent firms entering the industry and competing away the
supernormal profit.

5.3. Monopolistic competition

Although economics textbooks tend to concentrate more on discussing perfect

competition and monopoly, monopolistic competition and oligopoly are more
prevalent in practice. Monopolistic competition is considered as an intermediate form
of market structure between perfect competition and monopoly.

There are five main conditions for monopolistic competition to exist:

1. There are many buyers and sellers in the industry.

2. Each firm produces a slightly differentiated product.
3. There are minimal barriers to entry or exit.
4. All firms have identical cost and demand functions.

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 5. Firms do not take into account competitors’ behaviour in determining price
and output.

As far as the first condition is concerned, there may be a few large dominant firms
with a large fringe of smaller firms, or there may be no very large firms but just a
large number of small firms. Grocery retailing is an example of the first situation,
while the car repair industry is an example of the second. In both cases there is
product differentiation, and the significance of this is that firms are not price-takers,
but, rather, have some control over market price.

However, this control is not as great as that of the monopolist for two reasons. First
the firms’ products have closer substitutes than the product of a monopolist, making
demand more elastic. The second reason is related to the third condition above: the
low barriers to entry mean that any supernormal profit is competed away in the long
run. This also involves the fourth condition, that firms have identical cost curves.

5.4. Oligopoly

An oligopolistic market structure describes the situation where a few firms dominate
the industry. The product may be standardized or differentiated; examples of the first
type are steel, chemicals and paper, while examples of the second type are cars,
electronics products. The most important feature of such markets that distinguishes
them from all other types of market structure is that firms are interdependent.
Strategic decisions made by one firm affect other firms, who react to them in ways
that affect the original firm. Thus firms have to consider these reactions in
determining their own strategies. Such markets are extremely common for both
consumer and industrial products, both in individual countries and on a global basis.
However, there is a considerable amount of heterogeneity within such markets. Some
feature one dominant firm, like Intel in computer chips; some feature two dominant
firms, like Coca-Cola and Pepsi in soft drinks; some feature half a dozen or so major
firms, like airlines, mobile phones or athletic footwear; and others feature a dozen or
more firms with no really dominant firm, like car manufacturers, petroleum retailers,
and investment banks. Of course, in each case the number of major firms depends on
how the market is defined, spatially and in terms of product characteristics.

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The main conditions for oligopoly to exist are therefore as follows:

1. A relatively small number of firms account for the majority of the market.

2. There are significant barriers to entry and exit.

3. There is an interdependence in decision-making.

As far as the first condition is concerned there are a number of measures that are
used to indicate the degree of market concentration in an industry.

The easiest to interpret are the four-firm or eight-firm concentration ratios. These
indicate the proportion of the total market sales accounted for by the largest four or
eight firms in the industry.

In order for oligopolies to evolve and maintain their market structure there must be
significant barriers to entry and exit. These barriers may be economies of scale, sunk
costs and brand recognition and others. Such barriers prevent or discourage the entry
of new firms and allow existing firms to make supernormal profit, even in the long
run.

The third condition above, interdependence in decision-making, is heavily dependent

on a branch of decision theory known as game theory.

6. Applicable Market Structure to Developing Countries

6.1. Literature Review

According to Marvin Miracle, there is little agreement in the literature on the nature
of market structures in developing countries. At one pole many studies suggest
perfect competition, or something close to it, as typical of entire sectors of
developing economics generally.

For example, the view that the agricultural sector of developing countries is typically
extremely competitive is advanced by Edhard S. Masoi when, in contrasting
concentration of economic power in the United States and Britain with less
developed countries such as India and Pakistan, he says "in India and Pakistan ...
where half to two-thirds of the national income comes from, and three quarters to

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four-fifth of the labour force is employed in, agriculture, general concentration is
low. But we may be sure that, as these countries industrialize, general concentration
will increase”. Benjamin Higgins goes even further in saying that "nothing
approaches the purely competitive ideal more closely than peasant agriculture" in
developing countries, and he takes the view that in Indonesia and the Philippines, at
least, it has been "the monopolized industrial sector that expanded, not the
competitive rural sector." Visions of a competitive rural sector are also conjured up
when Kelly Harrison says "atomistic completion is present in most aspects of
commodity production and marketing in developing nations."

Other contributors near the competitive pole cover a narrower geographic scope but
similarly maintain that ,something close to atomistic competition is characteristic of
major sectors, commodities, or markets in Latin America, generally, the Philippines,
India, Java, Thailand, Vietnam, Uganda, Nigeria, Ghana, Sierra Leone, Guatemala,
Haiti, and Jamaica. Extreme competition is reported for the agricultural sector of
Latin America generally by Mintz; for rice and maize, both dietary staples, in the
Philippines by Ruttan; for rice in Thailand and Vietnam.

At the other pole, are numerous studies characterizing all developing economies as
ones in which imperfect competition prevails. Willard F. Mueller argued that the
conditions of developing economies result in so much buyer attachment and other
type, of product differentiation that anything more competitive than monopolistic
competition is unlikely.

The greatest differences in opinion seem to concern the agricultural sector. Some of
those who see an abundance of restrictions to competition include the agricultural
sector in their generalization, but none of those who talk of atomistic Competition
claim it is characteristic of the industrial sector. There seem, to be a consensus that
developing countries everywhere, in their effort to industrialize rapidly, provide
enough protection to industrial firms that there is no reason to expect much
competition in this sector.

Clearly many of these generalizations about entire countries and larger groupings,
even for sectors within these economies-go too far. Market structures may vary
greatly within any economy from one commodity to another, or from market to
market for the same commodity. Where market structures do vary, generalizations
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ideally should be generated by first identifying structures for all the major
commodities and then devising an average in which commodities are given weights
that reflect their relative importance in attempting some goals that have been set for
the economy.

Data and manpower problems of developing countries, however, are such that it
would be unrealistic to expect comprehensive empirical indicators of this sort for the
time being.

The capital markets in developing countries are so imperfectly competitive, that they
are commonly an enormous harrier to market entry. This is a relationship that has
been largely ignored. Economist, interested in market structure have been
preoccupied with Western economies in which capital has long been relatively
abundant and capital markets typically work well. Therefore, as the literature on
industrial organization developed, it was correctly argued that capital and capital
markets were not an important obstacle to market entry, and therefore capital was not
an important variable in explaining, patterns of competition in the economies the
majority of economists were interested in. The special condition of developing
countries relevant to analysis of their market structures have not been fully reflected
in the market structure analysis that has been done to date.

Given conditions commonly found in early phases of development, imperfections in

capital and product market, are mutually reinforcing, all leading to a high degree of
concentration of economic power in most, or all goods and service, requiring
significant amounts of capital in production or distribution.

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 6.2. Findings

In developing countries some commodities like agricultural commodities like cereals

are characterized by market structure close to perfect completion. However, some
conditions like information asymmetry and other hindrances or restrictions are
challenging the market structure to be the ideal perfect competition.

On the other extreme, some commodities in the developing countries like electric
power, telecom services are being supplied by a single seller (the government) and
these commodities are characterized by monopoly market structure.

Our practical observation tells us that majority of the industrial products like clothes,
food items, beauty care products, soft drinks; books etc are characterized by
monopolistic competition market structure where there are many sellers of a
differentiated product and entry into or exit from the industry is rather easy in the
long run.

Oligopoly market structure is not common in developing countries as such and there
is no successful oligopoly market as that of Oil Producing and Exporting Countries
(OPEC).

From the above assessments, is can be safely concluded that there is no single market
structure that fits for all commodities in the economies of developing countries.
Besides, the economies of developing countries is at the early stage of free market
economy where there are government interventions so as to manage market failures.

Access to capital, information and lack of institutional/cultural set up that guarantee

the existence of free market challenges perfect competition in the economies of
developing countries. Thus, most of the commodities in developing countries are
characterized by monopolistic competition nature and few products like electricity
and telecom services are in the hand of the government (monopoly type of market
structure).

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7. Conclusion and Recommendation

7.1. Conclusion

There is a good reason to think that major departure from the competitive the
competitive model is found throughout developing economies even in the
agricultural sector. Access to capital, information asymmetry and transportation
costs are the challenges the hamper from practicing perfectly competitive market
structure.

Most of the private sectors, particularly the manufacturing and service sectors are
characterized by monopolistic competition nature of market system. Other few
sectors in the hands of the government like electricity and telecom services are
characterized by monopoly market system.

Many literatures indicate that perfect competition is ideal and only for theory
purpose and to be used as extreme reference for understanding the other market
structure/systems.

7.2. Recommendation

Based on the above discussions, perfect competition is ideal and cannot be

practical. On the other hand, other extremes like monopoly market structure are
inefficient in resource allocation and compromise economic welfare.

On the other hand government intervention to some extent is inevitable in

developing countries due to market failure. The governments need to provision of
public goods like infrastructure and public utilities and limited price regulation,
regulation of externalities need government interventions.

In general, moving closer to free market particularly perfect competitive market

structure is recommended for developing countries; however, it should be step-
by-step and taking the prevailing market situation in to consideration.

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But, for the short run balancing government intervention and market forces is
recommended and there is no single market structure that perfectly feet the
prevailing situation of any developing country.

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 8. Reference

Andrew, Cohen (2004). "Market structure and market definition: the case of small
market banks and thrifts". Economics Letters
https://doi.org/10.1016/j.econlet.2004.02.018
Dr Shawn Cunningham (2011): “Understanding market failures in an Economic
Development Context”,
http://www.researchgate.net/publication/264943101
Ganeshan Wignaraja (2003): Competitiveness Strategy in Developing Countries,
Routledge studies in development economics,
https://pps.uniga.ac.id/wp-content/uploads/2019/11/POLICY-ANALYSIS-
Competitiveness-strategy-in-developing-countries-A-manual-for-policy-
analysis.pdf
James R. Tybout (2000): Manufacturing Firms in Developing Countries: How Well
Do They Do, and Why? Journal of Economic Literature Vol. XXXVIII
https://www.enterprise-development.org/wp-content/uploads/
Manufacturing_Firms_in_Developing_Countries.pdf
Marvin Miracle (1970): Comparative Market Structures in Developing Countries.
https://pdf.usaid.gov/pdf_docs/PNABI395.pdf
Olivier De Bandt and and E. Philip Davis (1999): A Cross-Country Comparison Of
Market Structures In European Banking; European Central Bank, Working
Paper Series;
https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp007.pdf
Ratna Sahay (1989): Trade Policy and Market Structure Interactions in Developing
Countries, IMF WORKING PAPER,
https://www.elibrary.imf.org/view/journals/001/1989/091/article-A001-
en.xml

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