Types of Market Structures

What is market structure and what factors determines them? 

Market structures refer to the features of a market that shape how firms behave. Economists focus on several key factors:

• The number of firms in the market and their relative sizes

• The potential for new firms to enter or exit the market, and the ease or difficulty of doing so

• The degree of similarity between products in the market

• How much information is shared among firms in the market

• The extent to which the actions of one firm influence others in the market

Firms within an industry can differ significantly from one another. In 2007, Myanmar dominated the global ruby market, accounting for 90% of production and still being recognized for producing the finest rubies in the world! In contrast, the U.S. airline industry is largely controlled by four major domestic carriers: American Airlines, Delta Airlines, Southwest Airlines, and United Airlines. In some markets, such as agriculture, numerous farmers sell identical products to many buyers, making it easy for consumers to compare prices. 

Thus it can be concluded that: 

• When a single firm dominates the entire market, like Myanmar's control of ruby production in 2007, the market structure is referred to as a monopoly. 

• If a market is controlled by a small number of large firms, it is called an oligopoly. (ie, The US Airlines) 

•  In a perfectly competitive market, there are many suppliers and buyers, with none large enough to dominate the market.. (ie Agricultural Markets) 

Perfect Competition Market Structures: 

The defining features of the perfect competition market structure are such that it is highly desirable, both for the consumer and the concerned firms, under certain conditions. A few of the major defining characteristics of perfectly competitive markets include a large number of buyers and sellers, the price-taking behavior of firms, free entry and exit, perfect price knowledge, homogeneity of products, and profit maximization where marginal cost equals marginal revenue.

Oligopoly market structure:

In the oligopolistic market structures, the concentration of suppliers is among a few hands that jointly command the share of the industry's total output. The estimate may reach approximately 80% or more of the supply. Therefore, this concentration means a few big firms hold the reins and individually exert great influence in price and output determination. One of the most important features of oligopoly is interdependence among firms: one firm's strategy-changing price or changing the level of production-directly affects the strategies and profitability of other firms. This makes the market slightly uncertain because every firm has to be very tactful and foresee the possible reaction from its rivals.

Beyond this, oligopolistic markets have high entry and exit barriers. These barriers will protect the existing firms from the new entrants, and such barriers are usually created from factors such as high capital requirements, strong brand loyalty, or control over resources that are crucial. Because of this, each firm that is part of an oligopoly often sells products that are differentiated yet broadly similar or even identical in highly concentrated markets.

Monopoly market structures: 

With this type of market structure, the monopoly firms have protection against potential entrants due to high entry and exit barriers. Such barriers may be in substantial advertisement costs or huge startup expenses that may influence or act as discouragement factors for new competitors entering into the market. Economies of scale also often enable monopolistic firms to lower costs and raise their efficiency compared with any entrant trying to get a foothold. Thus, barriers protect not only the exsisting firms from competition but also help the monopolistic firm retain control over price and market supply.

More importantly, monopolistic firms have always involved high product differentiation that assists in their market powers. For this reason, monopolists sell products that are unique and often consumer identified, thereby giving other competitors limited or no opportunity to offer close alternatives. This can be done by branding, quality, features, or any other attributes that will set the product apart. With more commodity differentiation, the monopoly power will be more influential because consumers may develop brand loyalty or a preference for what a monopolist has to offer rather than alternatives.

Conclusion

It means that through market concentration, one can ascertain the level of competition that exists within a particular market dominated by firms. It is referred to as the manner in which the largest producers of an industry are controlled. Market concentration is thus measured through the use of the concentration ratio expressed as follows: Total sales of the largest N firms in the industry /Total sales of all firms in the industry. It is a useful ratio in deducing whether the industry has a few large firms-a situation that would indicate oligopoly-or even just one firm, as in a monopoly. The concentration ratio becomes particularly helpful when the government is considering approval or disapproval of mergers and acquisitions, since such a move may affect market dominance and competition.