Market Structure

Market Structure Overview

Most Essential Learning Competency

The focus is to differentiate various market structures based on the following factors:

• Number of sellers
• Types of products
• Entry/exit barriers in the market
• Pricing power
• Other relevant factors

Learning Objectives

• Define and discuss market and market structure
• Differentiate between monopoly, oligopoly, perfect competition, and monopolistic competition
• Provide examples of businesses according to the market characteristics they belong to

General Market Structure Concept

Competition: Rivalry among sellers in the market. It can be diffused or impersonal, where sellers compete to sell their goods, and buyers use purchasing power to acquire these goods.

Factors affecting competition:

• Number and size of buyers and sellers
• Similarity or type of product
• Resource mobility
• Entry and exit of firms
• Knowledge of economic agents about prices, costs, demand, and supply

Types of Market Structures

1. Perfect Competition

Perfect competition is an ideal situation for buyers and sellers.

Characteristics:

• Many buyers and sellers with negligible impact on market prices.
• Homogeneous products (identical goods) with no preference among sellers.
• Perfect mobility of resources and perfect knowledge of market conditions.
• Price and output are determined by demand and supply.

Example: Agricultural markets (e.g., rice, wheat) due to a large number of producers, free entry and exit, and identical products.

2. Imperfect Competition

Occurs when one or more assumptions of perfect competition are not met. Types include:

• Monopoly
• Monopolistic Competition
• Oligopoly

3. Monopoly

A monopoly exists when a single firm dominates the market with no close substitutes.

Reasons for Monopoly:

• Control over raw materials
• Economies of scale
• Government franchise or patents

Example: Utility companies (e.g., electricity, water) due to high entry costs.

Intellectual Property: Patents and copyrights protect monopoly power, like Jollibee’s patents and copyrights.

4. Monopolistic Competition

Monopolistic competition occurs when products are differentiated, and entry and exit are easy.

Characteristics:

• Many firms sell differentiated products (similar but not identical).
• Products are differentiated through branding, design, packaging, etc.
• Free entry and exit in the market.
• Firms have some control over price and output.

Examples: Fast food, soft drinks, clothing, automobiles.

5. Oligopoly

An oligopoly is a market dominated by a few firms with strategic interactions.

Characteristics:

• Few firms dominate the market.
• Firms are interdependent and can influence prices.
• Barriers to entry include economies of scale, reputations, patents, loyal customer bases, and large capital investments.

Examples: Car industry, petrol retail, pharmaceuticals, coffee shops, airlines.

Cooperative behavior: Firms may collude to raise prices or control output (e.g., OPEC).

Significance of Market Structure

The type of market structure affects the degree of control businesses have over prices, product differentiation, and overall profitability.

Greater market power allows firms to control pricing and create opportunities for higher profits.