Adam Smith
Adam Smith

Market Structure in economics, depicts how firms are differentiated and categorised based on 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.

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 [1]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.

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.

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.[9]

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.

Measure of market structure

Besides market structure, many factors contribute to conduct and market performance. Thus, it is essential to assess all the circumstances affecting competition rather than rely solely on measures of market structure.

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

See also

References

  1. ^ Kenton, Will. "Karl Marx". Investopedia. Retrieved 2020-11-05.
  2. ^ Mirman, Leonard J.; Salgueiro, Egas; Santugini, Marc (2015-09-08). "Learning in a Perfectly Competitive Market". Rochester, NY. Cite journal requires |journal= (help)
  3. ^ 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). https://doi-org.ezproxy.library.uq.edu.au/10.1134/S0005117914080141
  4. ^ 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.
  5. ^ "Duopoly". Intelligent Economist. 2019-04-15. Retrieved 2020-11-05.
  6. ^ 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.CS1 maint: others (link)
  7. ^ Franklin, Fisher (1991). Industrial Organization, Antitrust, and the Law. Cambridge, MA, MIT Press.
  8. ^ Manning, Alan (2003). Monopsony in motion : imperfect competition in labor markets. Princeton, N.J. ISBN 978-1-4008-5067-9. OCLC 864138963.
  9. ^ Body of Knowledge on Infrastructure Regulation “Market Structure: Introduction.”