Adam Smith
Adam Smith

Market structure, in economics, depicts how firms are differentiated and categorised 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 a equilibrium quantity.

Market definition is an important issue for regulators facing changes in market structure, which needs to be determined.[1] The relationship between buyers and sellers as the main body of the market includes four situations: the relationship between sellers (enterprises and enterprises), the relationship between buyers (enterprises or consumers), the relationship between buyers and sellers, the relationship between buyers and sellers, the relationship between buyers and sellers, 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. These relationships are the market competition and monopoly relationships reflected in economics.

History

See also: Laissez-faire

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[2] 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.

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.

Types

Based on the factors that decide the structure of the market, the main forms of market structure are as follows:

Features of market structures

The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate the market conditions. The elements of Market Structure include the number and size of sellers, entry and exit barriers, nature of product, price, selling costs. Market structure can alter based on the new external factors, such as technology, consumer preferences and new entrants. Therefore, elements of Market Structure always stay the same but the importance of a single element may change making it more influential on the current structure.

Competition is useful because it reveals actual customer demand and induces the seller (operator) to provide service quality levels and price levels that buyers (customers) want, typically subject to the seller's financial need to cover its costs. In other words, competition can align the seller's interests with the buyer's interests and can cause the seller to reveal his true costs and other private information. In the absence of perfect competition, three basic approaches can be adopted to deal with problems related to the control of market power and an asymmetry between the government and the operator with respect to objectives and information: (a) subjecting the operator to competitive pressures, (b) gathering information on the operator and the market, and (c) applying incentive regulation.[10]

Quick Reference to Basic Market Structures
Market Structure Seller Entry & Exit Barriers Nature of product Number of sellers Number of buyers Price
Perfect Competition No Homogeneous Many Many Uniform price as their price takers
Monopolistic competition No Closely related but differentiated Many Many Partial control over price
Monopoly Yes Differentiated (No Substitute) One Many Price Maker
Duopoly Yes Homogeneous or Differentiated Two Many Price rigidity due to price war
Oligopoly Yes Homogeneous or Differentiated Few Many Price rigidity due to price war
Monopsony No Homogeneous or Differentiated Many One Price taker (as there is only one buyer)
Oligopsony No Homogeneous or Differentiated Many Few Price Taker
Karl Marx
Karl Marx

The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly, and pure monopoly.

The main criteria by which one can distinguish between different market structures are: the number and size of firms and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely. In today's time, Karl Marx's theory about political influence on market makes sense as firms and industry are affected strongly by the regulation, taxes, tariffs, patents imposed by the government. These affect the barriers to entry and exit for the firms in the market.

Perfect competition:

1. There are many buyers and sellers in the market, and there is no fixed buying and selling relationship between them.

2. The products or services traded in the market are all the same without any difference.

3. There are no barriers to entry and exit from the market.

4. There are no trade secrets.

5. Capital resources and labour are easily transferable.

Monopolistic Competition:

There are a large number of enterprises, there are no restrictions on entering and exiting the market, and they sell different products of the same kind, and enterprises have a certain ability to control prices.[11] Monopolies have complete market control as the barriers to entry are high and the threat of new entrants is low; therefore they can price set to their preference.

Oligopoly:

The number of enterprises is small, entry and exit from the market are restricted, product attributes are different, and the demand curve is downward sloping and relatively inelastic. Oligopolies are usually found in industries in which initial capital requirements are high and existing companies have strong foothold in market share.

Monopoly:

The number of enterprises is only one, access is restricted or completely blocked, and the products produced and sold are unique and cannot be replaced by other products. The company has strong control and influence over the price of the entire market.

Importance of Market Structure

Market structure is important for a firms use as it motivations, decision making, opportunities. This will incur changes to current market standings affecting: market outcomes, price, availability and variety.[12]

Market structure provides indication on potential opportunities and threats which can influence business to adapt there processes and operations in order to meet market structure requirements in order to stay competitive. For example being able to understand market structure will help to identify any product substitutability a foundation element of market structure analysis to then determine the best course of action.

Measure of market structure

Besides market structure, many factors contribute to conduct and market performance. Market pressures are similarly evolving therefore when decision making based on market performance it is essential to assess all the circumstances affecting competition rather than rely solely on measures of market structure. Using a single measurement of market share can be misleading or inconclusive as only indicators are taken into account.[13]


Different aspects that have been taken into account to measures the innovative advantage within particular market structures are: the size distribution of firms, the existence of certain barriers to entry, and the stage of industry in the product lifecycle.[14] Creating another measure to determine the current market structure that can be used as evidence or to evaluate current market performance thus it can be used to forecast and determine future trends.

Herfindahls index and types of market structure
Herfindahls index and types of market structure

See also

References

  1. ^ Andrew, Cohen (2004). "Market structure and market definition: the case of small market banks and thrifts". Economics Letters. 85: 77–83. doi:10.1016/j.econlet.2004.02.018.
  2. ^ Kenton, Will. "Karl Marx". Investopedia. Retrieved 2020-11-05.
  3. ^ Mirman, Leonard J.; Salgueiro, Egas; Santugini, Marc (2015-09-08). "Learning in a Perfectly Competitive Market". Rochester, NY. SSRN 2501419. ((cite journal)): Cite journal requires |journal= (help)
  4. ^ Bykadorov, I.A., Kokovin, S.G. & Zhelobod’ko, E.V. Product diversity in a vertical distribution channel under monopolistic competition. Autom Remote Control 75, 1503–1524 (2014). doi:10.1134/S0005117914080141
  5. ^ Cominetti, Roberto; Correa, José R.; Stier-Moses, Nicolás E. (2009-06-03). "The Impact of Oligopolistic Competition in Networks". Operations Research. 57 (6): 1421–1437. doi:10.1287/opre.1080.0653. hdl:10533/141236. ISSN 0030-364X. S2CID 18608931.
  6. ^ "Duopoly". Intelligent Economist. 2019-04-15. Retrieved 2020-11-05.
  7. ^ a b c d Economics of strategy. David Besanko (6. ed., internat. student version ed.). Hoboken, NJ: Wiley. 2013. ISBN 978-1-118-31918-5. OCLC 835302276.((cite book)): CS1 maint: others (link)
  8. ^ Franklin, Fisher (1991). Industrial Organization, Antitrust, and the Law. Cambridge, MA, MIT Press.
  9. ^ Manning, Alan (2003). Monopsony in motion : imperfect competition in labor markets. Princeton, N.J. ISBN 978-1-4008-5067-9. OCLC 864138963.
  10. ^ Body of Knowledge on Infrastructure Regulation “Market Structure: Introduction.”
  11. ^ Mathieu,Philip,Jacques-François, Parenti,Ushchev, Thisse (2017). "Toward a theory of monopolistic competition". Journal of Economic Theory. 167: 86–115. doi:10.1016/j.jet.2016.10.005.((cite journal)): CS1 maint: multiple names: authors list (link)
  12. ^ "Market Structure". www.westga.edu. Retrieved 2022-05-03.
  13. ^ Khan, Habib Hussain; Ahmad, Rubi Binit; Gee, Chan Sok (2016-08-04). Hernandez Montoya, Alejandro Raul (ed.). "Market Structure, Financial Dependence and Industrial Growth: Evidence from the Banking Industry in Emerging Asian Economies". PLOS ONE. 11 (8): e0160452. doi:10.1371/journal.pone.0160452. ISSN 1932-6203. PMC 4973879. PMID 27490847.
  14. ^ Acs, Zoltan J.; Audretsch, David B. (1987). "Innovation, Market Structure, and Firm Size". The Review of Economics and Statistics. 69 (4): 567–574. doi:10.2307/1935950. ISSN 0034-6535. JSTOR 1935950.