Market Structure

Page 1

MARKET STRUCTURE

Market is a place where the interaction between buyers and sellers occurs to resolve the economic problems on what and how many goods to produce through the market forces of supply and demands.

1. Perfect Competition

Occurs when there is a large number of small companies competing against each other.

Lack price influence over the commodities, and free to enter or exit the market.

Consumers have full knowledge of goods being sold - aware of the prices charged on them and the product branding Useful when comparing companies with similiar features.

This market is unrealistic as it faces some significant criticism.

No incentive for innovation

competition exists and a company holds a dominant market share

* tendency to increase innovation to beat the competitors and maintain the status quo

* However, in a perfectly competitive market, the profit margin is fixed, and sellers cannot increase prices, or they will lose their customers.

(There are very few barriers to entry)

* Any company can enter the market and start selling the product

2. Monopolistic Competition

* refers to the markets which have a large number of sellers producing similar but not identical (differentiated) products.

* Sellers compete among themselves

* can differentiate their goods in terms of quality and branding to look different

* sellers consider the price charged by their competitors and ignore the impact of their own prices on their competition.

* In the short term, the monopolistic company maximizes its profits and enjoys all the benefits as a monopoly.

* The company initially produces many products as the demand is high.

*Therefore, its Marginal Revenue (MR) corresponds to its Marginal Cost (MC). However, MR diminishes over time as new companies enter the market with differentiated products affecting demand, leading to less profit.

3. Oligopoly

* consists of a small number of large companies that sell differentiated or identical products

* their competitive strategies are dependent on each other.

* Characteristics ( Few numbers of large firms, homogeneous or differentiated product , mutual interpendence, barriers to entry)

* if one of the actors decides to reduce the price of its products, the action will trigger other actors to lower their prices, too.

* a price increase may influence others not to take any action in the anticipation consumers will opt for their products

* strategic planning by these types of players is a must.

*

4. Monopoly

* a single company represents the whole industry

* has no competitor, and it is the sole seller of products in the entire market.

* characterized by factors such as the sole claim to ownership of resources, patent and copyright, licenses issued by the government, or high initial setup costs.

* The company remains a single seller because it has the power to control the market and set proces for its goods.

Page 2

MARKET STRUCTURE

Market is a place where the interaction between buyers and sellers occurs to resolve the economic problems on what and how many goods to produce through the market forces of supply and demands.

1. Perfect Competition

Occurs when there is a large number of small companies competing against each other.

Lack price influence over the commodities, and free to enter or exit the market.

Consumers have full knowledge of goods being sold - aware of the prices charged on them and the product branding - useful when comparing companies with similar features.

This market is unrealistic as it faces some significant criticism.

No incentive for innovation

competition exists and a company holds a dominant market share

tendency to increase innovation to beat the competitors and maintain the status quo

However, in a perfectly competitive market, the profit margin is fixed, and sellers cannot increase prices, or they will lose their customers.

There are very few barriers to entry

Any company can enter the market and start selling the product

2. Monopolistic Competition

Refers to the markets which have a large number of sellers producing similar but not identical (differentiated) products.

Sellers compete among themselves

Can differentiate their goods in terms of quality and branding to look different

Sellers consider the price charged by their competitors and ignore the impact of their own prices on their competition.

In the short term, the monopolistic company maximizes its profits and enjoys all the benefits as a monopoly.

The company initially produces many products as the demand is high.

Therefore, its Marginal Revenue (MR) corresponds to its Marginal Cost (MC). However, MR diminishes over time as new companies enter the market with differentiated products affecting demand, leading to less profit

3. Oligopoly

Consists of a small number of large companies that sell differentiated or identical products

Their competitive strategies are dependent on each other.

Characteristics

Few numbers of large firms

homogeneous or differentiated product

mutual interdependence

barriers to entry

If one of the actors decides to reduce the price of its products, the action will trigger other actors to lower their prices, too.

A price increase may influence others not to take any action in the anticipation consumers will opt for their products

Strategic planning by these types of players is a must

4. Monopoly

A single company represents the whole industry

Has no competitor, and it is the sole seller of products in the entire market.

Characterized by factors such as

the sole claim to ownership of resources

patent and copyright

licenses issued by the government

high initial setup costs.

The company remains a single seller because it has the power to control the market and set process for its goods.