LESSON 2: DIFFERENTIATE VARIOUS MARKET STRUCTURES

INTRODUCTION
In the business world, there are different degrees or categories of competition and
other market characteristics that influence economic decisions. This is referred to as market
structures. Learning about market structures will help you understand how sellers and buyers
behave.

MARKET
A market is one of the numerous infrastructures, systems, institutions, social relations,
and procedures, wherein buyers and sellers usually interact with each other to exchange
goods and services.

MARKET STRUCTURE
Market structures are the key points in evaluating business’ economic
environments. The significant operational definition of market structure is a concern to both
economists and marketers since they have different methodological approaches in this,
and each of them has their strengths and weaknesses.
The most notable characteristics of market structures:

• The relationship between a seller to another seller, a seller to his/her buyer, and many
more. The product that has been sold and the extent of product differentiation,
which affects cross-price elasticity of demand.
• The number of companies or corporations, including the scale and range of international
competition, in the market. The concerns in entering and exiting the market.
• The dissemination of market shares for the largest firms.
• The number of buyers and how they behave to mandate a product’s price and
• quantity.
• The turnover of customers which can be affected by the extent of consumer or
• brand loyalty and the influence of persuasive advertising and marketing.

MONOPOLY
Monopoly (from the greek «mónos», single, and «polein», to sell) is a form of market
structure of imperfect competition, mainly characterized by the existence of a sole seller and
many buyers. This kind of market is normally associated with entry and exit barriers. All of these
features give the monopolist the ability to set prices with the only limitation of consumers'
willingness to pay. Therefore, in monopolies, the seller is a price- maker and consumers will be
price-takers.

The most notable characteristics of monopoly:

• Ownership of a fundamental resource - If the key resource is solely owned by a firm,

the firm can limit the access to this source, therefore creating a monopoly.
 • Economies of scale – In some sectors, a single firm can sustain products or goods at a
lower price than two or more firms could, resulting in a natural monopoly, which arises
even without the intervention of the government.
• Government Regulation – To suffice the interest of the public, the government usually
restricts market entries in a legal way, which is through copyright laws and patents.

EXAMPLE OF MONOPOLY
For example, in Saudi Arabia the government has sole control over the oil industry. A
monopoly may also form when a company has a copyright or patent that prevents others from
entering the market. Pfizer, for instance, had a patent on Viagra. In the Philippines, Meralco
is a major monopoly. Consumers have no choice on who they want to provide service for their
electricity. What happens is MERALCO ends up charging whatever the they want. You can't do
anything about it since if you complain or don't pay your bills, they just cut off your electricity.

OLIGOPOLY
Oligopoly (from the Greek «oligos», few, and «polein», to sell) is a form of market structure
that is considered as half way between two extremes: perfect competition and monopolies.
This kind of imperfect competition is characterized by having a relatively scarce number of
firms, but always more than one, which produce a homogeneous good. Due to the small
number of firms in the market, the strategies between firms will be interdependent, thus
implying that the profits of an oligopolistic firm will highly depend on their competitors actions.
The most notable characteristics of oligopoly:

• Entrepreneurs maximize profits.

• Oligopolies set prices rather than take price.
• There are a lot of barriers. It includes government licenses, economies of scale, patents,
and access to expensive and complex technology. Also, some government policies
are favoring the current companies in the industry so it is hard to enter for beginners.
• Interdependent. Like for example, if one firm change and decreases its price, it will
significantly affect the other firms.
• Rampant advertising since most companies use national media to promote their
products.

EXAMPLE OF OLIGOPOLY
Imagine yourself starting to build an automobile business. Since you are just a beginner,
you will set your price lower than your competitors. In this way, you can attract more
customers as they may notice the difference in price. Once you already have more customers
compared to other companies, they would be forced to lower their prices for them to gain
more clients and sales. This situation shows an oligopoly market structure.
Operating systems for smartphones and computers provide excellent examples of
oligopolies in big tech. Apple iOS and Google Android dominate smartphone operating systems,
while computer operating systems are overshadowed by Apple and Microsoft Windows. Big
tech also is concentrated on the Internet, with Google, Meta (formerly Facebook), and Amazon
dominating.
MONOPOLISTIC COMPETITION
Monopolistic competition is a market structure defined by four main characteristics:
large numbers of buyers and sellers; perfect information; low entry and exit barriers, similar but
differentiated goods. This last one is key to distinguish monopolistic competition from perfect
competition since in the latter all products are homogenous. This product differentiation leads
consumers to perceive products in this market as unique, providing firms with a monopolistic-
like property that enables them having price-making power.
The most notable characteristics of monopolistic competition:

• Every firm is a price setter and can maximize their profit.

• They sell similar yet slightly different products.
• The consumers can favor a product more than the other one.
• There are easy entrances and exit in this market. This type of market structure can be
observed in reality. Some of the common examples are:
• Cap’n Crunch, Lucky Charms, Froot Loops, and Apple Jacks, which are all companies that
sell breakfast cereals with small differences. McDonald and Burger King, which both sell
slightly different burgers. Nike and Adidas, which both sell running shoes, but are
different in some ways.

EXAMPLE OF MONOPOLISTIC COMPETITION

An example of monopolistic competition includes beauty products that have a very large
number of sellers and the products sold by every company which is similar yet not identical
these sellers cannot compete on prices as they can charge prices based on the uniqueness of
the product they are offering and this business has relatively low barriers to enter and exit the
market.
This example talks about farmers who produce food for the entire 7.7 billion population
of the world and about 80% of the world’s food.

Farmers also work in a monopolistic competitive market where many farmers (around
570 million farmers worldwide) produce similar crops that can differentiate based on quality,
size, etc.

PERFECT COMPETITION
Perfect competition or competitive markets-also referred to as pure, or free competition,
expresses the idea of the combination of a wide range of firms, which freely enter or leave the
market and which considers prices an information, since each bidder only provides a relatively
small share of the good to the market and thus do not exert a noticeable influence on it.
Therefore, perfect competitors cannot influence the levels of market clearing prices. Also,
buyers are numerous and disperse, which also means that they cannot influence prices.
The most notable characteristics of perfect competition:

• Homogeneous product: all firms offer the same goods, with the same characteristics and
quality as the others, without any variations.
• Large number of agents. there should be a sufficient quantity of buyers and sellers, so
that no action from a single agent will affect the market structure or its prices.
 • No entry or exit barriers: there has to be free entry and exit of agents in the market. This
assumption is of special interest for firms, which must be able to enter or leave the
market freely.
• Price flexibility, price adjustments to changes happen as fast as possible. Usually, price
changes are assumed instantaneous.
• Free and perfect information: all agents have perfect knowledge of products and their
prices, and everything else related to them, as well as free access to this information.
• Perfect factor mobility: all factors should be able to change so adjustments processes
can be carried out with the greatest efficiency.
• No government intervention: markets should be left alone as government intervention
would only lead to imbalances in perfectly competitive markets.

EXAMPLE OF PERFECT COMPETITION

A perfect example for perfect competition is the existence of online sellers. In
social media alone, there are many “ukay-ukay” retailers where the same kinds of second hand
items are being sold such as clothes, shoes, bags, and appliances. There are many buyers of
ukay-ukay items, and they are able to have information about the products based on what they
read in the posts. If you would want to become an online seller, it would be easy to start the
business. There will also be no difficulty if you decide to stop. But since there are many sellers
and products are homogeneous, your prices are almost similar which means that you will be a
price taker. You would have to accept and follow the existing price in the online selling business
of “ukay-ukay.”

CONCLUSION
Market Structure deals with strategic decision making and focuses on both economics
and marketing, making professional entrepreneurs precisely judge industry, policy changes, and
market news. Wherein, Monopoly, there is a single merchant of a product for which there is no
close alternative. While oligopoly there are few sellers of a standardized or a differentiated
product. Monopolistic competition a market where many firms sell differentiated products.
And, perfect competition, is a market structure in which many small firms compete with each
other, and there are no barriers to entry or exit from the market.