Market Structure g10 Economics

MARKET STRUCTURE
SUBJECT: ECONOMICS
GRADE: TEN
TEACHER: MS. NAVIANNA PERSAUD
MARKET STRUCTURE CONCEPT MAP
SPECTRUM OF MARKETS
DEFINITION:
A market structure is defined as the features that determine the
behaviour and performance of firms in the industry.
PERFECT COMPETITION
DEFINITION: Perfect competition is a market structure in which there are

many sellers and many buyers, producing a homogeneous product
THE FEATURES OF PERFECT
COMPETITION
In perfect competition, there are many sellers in the industry and there
are many buyers. By ‘homogeneous’, we mean that each unit of the
product is identical. Therefore, buyers will buy from any seller. There is
perfect knowledge in this market. This means that all buyers and sellers
are aware of the product, its features, its price and the other buyers and
sellers. There is one price prevailing in the market. Whatever quantity of
the product that firms produce in the market will be sold at the
prevailing price. No firm can influence price, as a firm’s output is only a
small part of the total output of the industry. The firm is therefore a
price-taker. The individual firm has no market power. There is freedom of
entry and exit. A new firm can enter the industry and start producing at
any time. An existing firm is free to leave the industry
MONOPOLY
DEFINITION: A monopoly is a market in which there is only one seller and

there are many buyers.
THE FEATURES OF A MONOPOLY
A monopoly, with one seller and many buyers. In a monopoly, the firm is the
industry. There is no competition, as the firm has no other firm with which to
compete. There are many buyers of the product. The product itself is unique and
has no close substitutes. There is imperfect knowledge in this market. This means
that buyers and sellers are not aware of all the information in the market. The
monopolist can only sell more at a lower price and, if price increases, less will be
sold. The firm produces a given quantity and sells it at the price the market is
willing to pay. Or the firm might choose a particular price and sell whatever it can
at that price. The firm is therefore a price-maker. The House of Angostura Bitters
and Carib Brewery Ltd are examples of monopolies in Trinidad. Carib Brewery in St
Kitts is also a monopoly producer of beer in the island. The state-owned water and
electricity companies in the Caribbean Islands are also monopolies – in this case,
government ones. Barriers to entry exist that prevent firms from entering the
industry. There is thus no free entry into the industry. Barriers to entry enable the
firm to remain a monopolist, as no new firms can enter and compete with the
monopolist.
A BARRIER TO ENTRY
DEFINITION: A barrier to entry is anything that prevents new firms from

entering and competing in an industry
Some barriers to entry are:
 Government regulations. These are laws that prevent new firms from
entering an industry; for example, in Caribbean economies there is
only one firm providing water, due to government regulations.
 Patents. A patent grants to the inventor exclusive rights to the
patented product or process.
 Large capital outlay that prevents smaller firms from entering an industry; for
example, oil refining.
 Ownership by the firm of a scarce factor of production. For example, Angostura
Trinidad Ltd is the only firm that possesses the knowledge of the secret ingredient in
the Angostura bitters recipe. (This is the factor ‘capital’, or ‘know-how’.)
MONOPOLISTIC COMPETITION
DEFINITION: Monopolistic competition is a market structure in which

there is competition amongst many firms.
A market structure of monopolistic competition has features of both
perfect competition and monopoly. In fact, even the name of this market
structure is a combination of monopoly and perfect competition. In this
market structure, there are many buyers and many sellers, just as in
perfect competition. The product is similar yet differentiated through
branding. This is product differentiation. This means that the product is
made to look different in the eyes of the consumer. This can be achieved
through packaging or even slight differences in product features and, of
course, giving the product a brand name. The products are still close
substitutes.
FEATURES OF A MONOPOLISTIC COMPETITION
Product differentiation gives the individual firm some degree of market power. For
example, only one firm produces Grace jerk seasoning. There is no substitute for Grace
jerk seasoning, even though other firms produce jerk seasoning! This is especially true
for the loyal consumer. In monopolistic competition, there is imperfect knowledge in this
market. This means that buyers and sellers do not have all the information on the
product, its features, its price and the other buyers and sellers. As with the monopolist,
more can only be sold at a lower price and less is sold if the price increases. The firm is
therefore a price-maker. It can choose a given quantity to produce, and sell this at the
price the market is willing to pay. Alternatively, it can choose a price and sell whatever
quantity it can at that price. There might be some barriers to entry in this market, though
they are not difficult to break through. While pure monopoly and perfect competition are
rare, monopolistic competition is more common in the region and throughout the world.
Some examples are restaurants, hair and beauty salons, and supermarkets. Monopolistic
competition is therefore a combination of the monopoly market structure and perfect
competition.
OLIGOPOLY
DEFINITION: An oligopoly is a market structure in which there are a few

firms competing in the market.
FEATURES OF OLIGOPOLY
Examples of an oligopoly in the region include: commercial banks, beer

brewing, petrol refining and the production of household detergents and
personal care products. In an oligopoly, there are few sellers and many
buyers. The product might be homogeneous (unleaded petrol) or
differentiated (detergents). There is imperfect knowledge in this market,
as firms and buyers might not know of all sellers, buyers, prices and
products available. Firms tend to avoid price competition and so prices
remain rigid or there is price-stickiness
PRICE RIGIDITY
DEFINITION: Price rigidity means that prices remain at a certain level

over a long period.
If firms increase prices, competitors will not follow, and so the given firm
will lose customers to its rivals (market share and revenue will also
decline). If the firm lowers prices, its competitors will also follow and so
the firm will not gain additional customers, market share or revenue. In
fact, revenue will fall. Cutting of prices will lead to price wars –
benefiting no firm, only the consumer
PRICE WAR
DEFINITION: A price war occurs when rival firms continuously reduce

prices to undercut each other.
Oligopolies might choose to enter into agreements with, or collude with,
other firms to maximise profits.
COLLUSION
DEFINITION: Collusion occurs when there are price and quantity

agreements with other firms.
A group of sellers colluding in this way is called a cartel. In many
countries cartels are illegal. There are high barriers to entry in this
market, usually due to high set-up costs. A private individual cannot
simply take a loan from a bank and set up a bank or an oil refining
company, as he does not have the knowledge or the large capital outlay.
The oligopoly is also a typical market structure in the real world, unlike
perfect competition and monopoly. Table 12.1 summarises the features
of each market structure.
THE FEATURES OF EACH MARKET
STRUCTURE
SUMMARY
 A market structure is defined as the features that determine the

performance and behaviour of firms in the market. There are four main
market structures: monopoly, oligopoly, monopolistic competition and
perfect competition.
 Monopoly, oligopoly and monopolistic competition are imperfect
competition.
 In perfect competition, there are many sellers and many buyers, the
product is homogeneous and there is perfect knowledge in the market.
The firm is a price-taker and there is freedom of entry into the industry.
 A monopoly has one seller and many buyers, the product is unique
and there is imperfect knowledge in the market. The firm is a price-
maker and there are barriers to entry.
 Barriers to entry prevent firms from freely entering the industry. They
might be legal barriers, patents, high set-up costs or inability to
access all factors of production.
 In monopolistic competition, there are many sellers and many
buyers, the product is similar yet differentiated and there is imperfect
knowledge in the market. The firm is a price-maker and there might
be simple barriers to entry.
 An oligopoly has few sellers and many buyers, and a differentiated or
homogeneous product; there is imperfect knowledge in the market.
There is price rigidity and there are high barriers to entry.
 Oligopolists might collude to make maximum profits and reduce the
chance of a price war, which will not benefit any firm.

Market Structure g10 Economics

Uploaded by

Copyright:

Available Formats

Market Structure g10 Economics

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Market Structure g10 Economics

Uploaded by

Copyright:

Available Formats

MARKET STRUCTURE

DEFINITION: Perfect competition is a market structure in which there are

DEFINITION: A monopoly is a market in which there is only one seller and

DEFINITION: A barrier to entry is anything that prevents new firms from

DEFINITION: Monopolistic competition is a market structure in which

DEFINITION: An oligopoly is a market structure in which there are a few

Examples of an oligopoly in the region include: commercial banks, beer

DEFINITION: Price rigidity means that prices remain at a certain level

DEFINITION: A price war occurs when rival firms continuously reduce

DEFINITION: Collusion occurs when there are price and quantity

 A market structure is defined as the features that determine the

You might also like