Market Structure HCM-2022

Market STRUCTURE
Dr. Devi Nair

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Market
•A market is an environment where producers and

consumers exchange goods and services at a price.
Market is an arrangement by which buyers and
sellers of a commodity interact to determine its
price and quantity.
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M&E 12/21/22
Market
The two economic variables, demand and supply ,
interact in the market to set the price and
quantity of the good through the price
mechanism.
Through price mechanism market decides

what, how and for whom to produce.
• In economics, market is a place where buyers
and sellers are exchanging goods and services
with the following considerations such as:
• Types of goods and services being traded

• The number and size of buyers and sellers in the
market
• The degree to which information can flow freely
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M&E 12/21/22
Market Structure
Market structure refers to the behavior of buyers
and sellers in a particular market.
• The size and relative size of buyers and sellers
• The ease of entry and exit from the market
• The extent of product differentiation
• The extent of knowledge and mobility of resources
• How many firms are in the industry
• How big each firms share
• How similar the products and services are
• Whether it is easy to or difficult for new firms to enter
the market
▫ Market theory : profit maximization
Types of markets
• Perfect or pure market

• Imperfect market
The Market Structure Continuum 7
Perfect
Competition Oligopoly
Monopolistic Monopoly
Competition
Market under perfect competition
It is a market structure in which many sellers
compete to sell a differentiated product.
Characteristics;
*Many sellers and many buyers
*Homogenous products
*Free entry and exit
*Perfect knowledge of market condition to sellers and
buyers.
*Perfect substitutes.
*Zero transportation cost.
*Firms are price takers
Perfect competition figure
• Perfect Competition is built on two critical
assumptions:
• The behavior of an individual firm
• The nature of the industry in which it operates.
They are:
The firm is assumed to be a price taker
The industry is characterized by freedom of
entry and exit
• Industry
• Normal demand and supply curves
• •More supply at higher price.
• Firm
• Price takers
• Have to accept the industry price
Types of imperfect markets
• Monopoly
• Oligopoly
• Monopolistic competition
Monopoly
• Comes from a Greek word ‘monos’ which means
‘one’ and ‘polein’ means to ‘sell’
• There is only one seller of goods or services
• A monopoly should be distinguished from a
cartel.
• (Cartel refers to a market situation in which
firms agree to cooperate with one another to
behave as if they were a single firm and thus
eliminate competitive behavior among them.)
Monopoly
• Monopoly occurs there is only one producer or
seller of goods and only one provider of services
in the market..
• Characteristics of monopoly market

▫ *There is only one seller
▫ *The product is unique and there is no close
substitute
Contd…
• *The monopolist can exercise control over the
price. They are known as price makers.
• *The existence of barrier to enter the market ,no
other firms can supply the product or service
because of legal, geographical, or technological
restrictions.
• There may or may not be advertisement
• It owns a patent or copyright.
•Main sources of monopoly
Legal restrictions; government creates monopolies
by law. Government may establish or take over an
industry and then prevents competition. It is illegal
to compete with it.
 e.g. postal service, electricity
Contd…
Natural factor endowments- When one
company or country is sole or dominant
owner of some kind of natural resources.
 E.g. Gulf countries and oil
 Brazil– coffee market
 Cuba—sugar etc.
High entry costs- Some industries set up high costs
to create a formidable barrier to entry. e.g.
petroleum products.
▫ In health, bio-medical instruments like whole body
scanner, ventilator etc
Patent- government encourage invention or
innovation by granting exclusive production rights
for a period of time, to those discover new products
or new methods.
▫ e.g. patent for HIV medicines, Cloning, in- vitro
fertilization techniques etc.
Continued…
Efficiency- effective management minimizes
wastes and leads to efficiency
▫ E.g. IBM and computer
Agreement between producers
▫ Number of firms acting together to create
monopoly power. E.g. OPEC [organization of
petroleum exports countries], W T U [world trade
union], International share market etc.
Oligopoly
• Comes from the Greek word “oligo” which means ‘few’ and
“polein” means ‘to sell’.
• small number of sellers, each aware of the action of
others .All decisions depend on how the firms behave in
relation to each other
• Oligopoly where few sellers dominate in the industry,
conjectural interdependence is present, that is, the decision
of one firm influences and are influenced by the decision of
other firms in the market.
• Characteristics;
• *Barriers to entry- these may be due to owner ship of
resources, large capital requirement, control of patents by
existing firms etc.
Continued…
• *Few sellers; it does not means the number of
sellers is very small. The number of firms may be
large but few firms account for the major portion
of industries productive capacity. That others are
insignificant as far as their market share is
concerned.
▫ E.g. in pharmaceutical distribution there are so
many firms, but few of them are leading like
Cadilla, CIPLA,MERCK ETC.
Continued…
• *Recognized mutual interdependence;
▫ Each firm recognizes that its profits are heavily
dependent on the actions of other firms in the
market.
• *Types of products under oligopoly
▫ products are either identical or differentiated.
• The biggest reason why oligopolies exist
is collaboration.
• Firms see more economic benefits in
collaborating on a specific price than in trying to
compete with their competitors.
• Examples of oligopolies can be found across major
industries like oil and gas, airlines, mass media,
automobiles, and telecom.
Kinked demand curve in oligopoly
• The oligopolist faces a kinked‐demand
curve because of competition from other
oligopolists in the market.
• If the oligopolist increases its price above the
equilibrium price P, it is assumed that the other
oligopolists in the market will not follow with
price increases of their own.
Monopolistic market
• Market situation in which there are many sellers
producing highly differentiated products.
• Monopolistic competition is also perfect
competition plus product differentiation.
• Product differentiation gives each monopolistic
competitor some market power, since each
competitor can raise price slightly without losing
all its customers.
• A large number of buyers and sellers in a given
market act independently.
Characteristics of monopolistic
competition
• A large number of buyers and sellers in a given market
act independently.
• There is a limited control of price because of product
differentiation.
• Sellers offer differentiated products or similar but not
identical products.
• New firms can enter the market easily. However, there is
a greater competition in the sense that new firms have to
offer better features of their products.
• Economic rivalry centers not only upon price but also
upon product variation and product promotion.
Monopsony
• A market situation in which there is only one buyer of
goods and services in the market. It is sometimes
considered analogous to monopoly in which there is only
one seller of goods and services in the market.
• Monopsony power gives them the ability to control their

unit cost for an input which is similar to the way the
monopoly controls their price.
Oligopsony
• A market situation where there are a small
number of buyers. This is usually with a small
number of firms competing to obtain the factors
of production.
• Under this market situation, firms are buyers
and not sellers. This is sometimes analogous to
oligopoly, where there are few sellers
Comparison of market structures
Market No. of Entry Type of control over
structure Firms product price
Perfect Many Unrestricted Undifferentiate Price taker

competition d
Monopolistic Many Unrestricted Differentiated Limited

control
Oligopoly Few Restricted Both, but less Has control
Monopoly One Restricted Unique Price maker

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Market Structure HCM-2022

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Market STRUCTURE

Dr. Devi Nair

•A market is an environment where producers and

Through price mechanism market decides

• Types of goods and services being traded

• Perfect or pure market

• Characteristics of monopoly market

• Monopsony power gives them the ability to control their

Perfect Many Unrestricted Undifferentiate Price taker

Monopolistic Many Unrestricted Differentiated Limited

Oligopoly Few Restricted Both, but less Has control

Monopoly One Restricted Unique Price maker

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