General large employer employs local labor. For two buyers

General concept of
market structure

A
market is a particular physical place where goods and services are exchanged by
selling and buying on a free competition such that one price for a commodity
prevails in the whole area. In economics, a detailed definition of the market
is provided as an entire area where parties involved in buying and selling of
products are spread.  This definition is
due to sale and purchase of goods with the help of agents and brokers thus
spreading the buyers and sellers over an extensive coverage. The transactions
for the process of buying and selling are communicated through phones,
telegrams, internet and other trending platforms (Chand, 2014). Despite the
variations, the cost price of a commodity remains the same throughout the
entire market. So the term market is not necessarily referring to a place but
merchandise and the competing buyers and sellers.

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 A market structure is organizational or
competitive characteristic of a market. These attributes describe pricing
policy and the competitive nature of a particular market. It gives more details
of number of firms producing similar goods and services and their structure
based on the nature of competition prevailing in the specific market

Determinants of market
structure

1.    Among the determinants of market structure
is number and nature of sellers. They vary from more significant number of
sellers to a single in a monopoly market.

2.     Nature and number of buyers: a market with
a single buyer is called a monopsony market. This kind of a market exists in a
situation where one large employer employs local labor. For two buyers
collaborating in a market is called a duopsony market. For many organized
buyers it’s referred as oligopsony. It is common in cash crop farming such as
tea, sugarcane, rice and other where local factories buy the entire harvest for
processing (“What is Market Structure? definition and meaning – Business
Jargons,” 2015).

3.    Nature of the product: The properties of a
product determine the structure of the market like in cases where it is
differentiated; the commodities are close substitutes making the market to be
characterized by monopolistic competition. If there is no product differentiation,
perfect competition market is observed. For products that are entirely
different from each other, it means no close substitutes are making the market
a monopoly.

4.    Entry and Exit rules: The entry and exit
from the market depend on the profitability or loss caused by a firm in the
market. More profits attract companies to join the market whereas losses
results to exit of firms that cannot keep up with the competition. Perfect
competition characterizes free entry and exit from the market. Monopoly bars
entry of any firm to the market. A setup that is common in delivering public
utility services such as power and water supply, postal, and transport
services. In oligopoly markets, entry is barred due to cartels, collusion,
tacit agreements and others. A situation where we have free entry and exit of
new firms is a monopolistic completion. This condition is possible since the
products in the market are differentiated

5.    Economies of scale: Firms which achieve
vast economies of scale proliferate than other firms in the industry. They can
compete with an added advantage leaving few firms to fight each other for
survival. This situation is an oligopoly market. On the other hand, if one firm
achieves large economies such that it eliminates all competitors and it can
meet total market demands, a monopoly market is attained.

 

Forms of market
structure

Based
on competition in the market, a market can be categorized into monopoly market,
perfect competition market, oligopoly market, monopolistic competition market,
and duopoly market.

Perfect competition
market

This
is a type of market which involves several sellers and buyers exist. All of the
buyers and sellers can exchange homogenous commodities at one prevailing price
in the market. There is exists no rival competition between involved parties.

Features of perfect
competition

Perfect
competition market is characterized by large numbers of buyers and sellers.

Since they are so many, a single buyer or seller cannot influence the price as
well as the output of that industry. 
They are too small compared to the entire market.

Product homogeneity is
another essential feature of this market. The competing firms provide
homogenous goods and services. This situation makes the buyers not to have any
preference for a particular seller since they all sell the same product. The
variation in price is what brings a change in the demand. Customers will buy
from a seller who is cheaper than others. Examples of these products are salt,
wheat coal, etc. (“Four Types of Market Structures – Quickonomics,”
2016).

This market allows
free entry and exit in the industry. Firms incurring massive losses due to
stiff competition can leave and start its operations in any other industry. The
mobility of sellers is not restricted.

Buyers
and sellers have complete knowledge of the market conditions like prices and
technology used to generate them. This knowledge gives them an opportunity to
buy and sell anywhere and anytime they wish. In this market, no transportation
costs are incurred in moving goods from a market to another. This measure is
important in maintaining homogenous price as transportation charges when added
to the price of the products will bring about variations. In this market, the
prices are determined by the shifts in demand and supply. No government or
large producer intervenes or control the prices.

Industry
characterizing perfect competition market

The
requirements of perfect competition market rarely exist in one industry. These
requirements make this market unrealistic. Most products are differentiated in
some level. Take for example bottled water. Producers vary the packaging,
brands, and methods of purification. These variations make the product
homogeneity quality hard to achieve. This obstacle and other tend to prevent this
type of market. However, the agricultural industry produces goods that are
homogenous and have no differentiation. A product like corn is similar
regardless of the location. The buyers are usually aware of their price and
demand shifts (Gallant, 2005). The industry is also free to enter and exit.

Monopolistic
competition

This
market has many firms that produce differentiated commodities that are close
substitutes for each other. The products are similar but not identical. They
compete on other factors rather than price.

Features of
monopolistic competition

The
primary feature of this market is product differentiation. The products are
slightly different but substitute for each other. This market involves a large
number of firms engaging in stiff competition since the products are
differentiated. Monopolistic competition allows free entry and exit of firms in
case they can’t keep up with the competition.

However, in this
market, firms have some controls on product prices. They can raise it or lower
it, and the buyers will respond accordingly. Due to the high competition, firms
spend vast amounts on advertisements and other sales promotion strategies.

Firms are also allowed to adjust the products to meet customers demand, and
this result in nonhomogeneity of the products

Industry
characterizing monopolistic competition

The
toothpaste industry is a form of monopolistic competition market. It is
characterized by a large number of sellers, differentiated commodities, several
close substitutes and entry and exit from the industry. With many firms in the
industry, there exist several brands of toothpaste like Sensodyne, crest, close
up, Aquafresh and many others. These firms produce similar but slightly
different item. The difference is flavors, names, texture, and packaging. To
cope up with competition, firms utilize advertisements. And claiming
superiority in quality (Hui, 2013)

Monopoly market

This is a market with
only one seller. The one firm sells unique commodity with restriction of new
firms.

Features of monopoly

The
single firm controls the supply of the product fully. This control makes the
elasticity of demand zero. The firm itself is the industry since it’s the only
firm. The firm is the price maker, not taker as in the perfect competition
market. Entry of new firms is barred in the industry, and there exist no close
substitutes for the products in monopoly.

Industry characterized
by monopoly

American
Tobacco Company has maintained control since late 19th to the early 20th
century. They singularly determined the prices (price maker) and the entry to
the market were restricted.

Oligopoly market

This
market has few sellers who sell homogenous or differentiated goods. It falls
between monopoly and monopolistic competition markets. Some sellers dominate
and control the price of products. In this market, firms can produce homogenous
(pure oligopoly) and heterogeneous commodities (differentiated oligopoly).

Features of oligopoly

This
market has few sellers and many buyers. Since there are few firms, they are
interdependent on one another. Change in the price done by one firm affects the
others, and they thus have to comply and adjust themselves to cope up with the
competition. Due to the competition, every firm advertises their products
frequently to reach out more customers. Firms can freely exit the industry but
face some barriers while entering. These restrictions include government
license, high capital requirement, Patent rules, the sophisticated technology
required and others. The firms are also not uniform regarding size.

Industry characterized
by Oligopoly market

Oligopoly is standard
in operating systems for phones and computers. Android dominates smartphones
for Google and iOS for Apple.  For
computers, the dominating operating systems are windows and Mac for Apple
computers. In both cases, price changes done by one firm prompts the other to
comply to compete and survive in the industry. Also, entry and exit to the
industry is allowed thus the emergence of different operating systems like
windows phone, Firefox OS, and Linux

 

 

 

 

 

 

 

References

Chand, S. (2014, March 3). Market
Structure: Meaning, Characteristics and Forms | Economics. Retrieved from http://www.yourarticlelibrary.com/economics/market/market-structure-meaning-characteristics-and-forms-economics/28736

Gallant, C. (2005, October 12). Does
perfect competition exist in the real world? Retrieved from https://www.investopedia.com/ask/answers/05/perfectcompetition.asp

Hui, J. T. (2013, July 9).

Monopolistic Competition Web log post. Retrieved from http://tayloreconexplorer.blogspot.co.ke/2013/07/monopolistic-competiton.html

The Four Types of Market Structures –
Quickonomics. (2016, September 6). Retrieved from https://quickonomics.com/market-structures/

What is Market Structure? Definition and
meaning – Business Jargons. (2015, December 8). Retrieved from http://businessjargons.com/market-structure.html