Market Structures

The Concept of Market 

In economics, a market is said to exist whenever a transaction is done between a buyer and a seller be it through a telephone, fax, telex, the post office or newspaper advertisement, etc.

Types of Market Structures 

Market structures are generally defined in terms of

  1. the number and importance of individual buyers and sellers in the market.
  2. the degree of differentiation of products being bought and sold.

According to economic theory, there are two dominant forms of market structures namely:

  1.  Perfect Competition
  2. Imperfect Competition

Perfect competition Market Structures

This is a theoretical market structures characterized by the following feature:

  1. Large number of sellers and buyers none of whom can influence the market equilibrium price.
  2. Non-differentiated product. The product being sold must be homogeneous, i.e. all sellers must be selling exactly the same kind of product. 
  3. There must be a free entry into and exit of sellers/firms from the market/industry.
  4. There must be a perfect flow of information to all sellers and buyers in the market.
  5. There must be no preferential treatment. 
  6. There must be perfect mobility of factors of production.
Market Structures

Price and output determination under perfect competition 

The equilibrium price under perfect competition is determined by the interaction of the forces of demand and supply, given that there are many sellers and buyers, such that no one can influence price. However, output determination is illustrated with the help of the diagram above. In the diagram, the marginal cost (MC) is shown to be U-Shaped and upward sloping, so also is the average cost curve (AC) while the demand curve (DD) is given as a horizontal line. The demand curve (DD)  also represents the marginal revenue curve (MR) as well as the average revenue curve (AR), since under the model all extra units produced or supplied are sold at the same price. As can be seen from the diagram, equilibrium output is determined by equating the marginal cost with the marginal revenue at point E in the diagram. At any point other than this, the firm is said to be operating inefficiently either making losses or making excess profits.

Conclusions drawn from perfect competition model

  1. All firms are price takers i.e. there is only one established equilibrium price and at this price, firms in the industry can produce and sell any quantity they wish.
  2. There is efficiency in the utilization of societal resources. 
  3. Firms are making normal profits , so consumers are not exploited.
  4. Marginal cost and marginal revenue rule or principle is used to determine the equilibrium level of output and price.

Competition is a situation where a number of sellers or manufacturers are striving for their customers. 

Advantages 

Competitors should:

  1. keep prices of commodities low.
  2. keep the quality of goods high.
  3. make the whole economic system efficient.
  4. ensure that all tastes will be catered for.
  5. keep services rendered high and good.

Disadvantages 

Competition often takes the wrong forms as highlighted below:

  1. Customers are competed for through expensive advertising.
  2. Service rendered can, in fact, suffer.
  3. There are times when the whole competitive situation seems dormant.
  4. It is wasteful.
  5. It really gives us what we want.
  6. Firms concentrate only on their most profitable products.

Imperfect Competition Market Structures

This is a market structure that is characterized by different degrees of imperfections. The most extreme case of imperfect market structure is termed monopoly. The other intermediate cases are oligopoly, monopolistic competition, discriminating monopoly and so forth. 

Monopoly 

A monopolist is a single seller or producer of a product which has no close substitutes. 

Main features of a monopoly

  1. As a single seller or producer of a product, he faces no competition and can vary his supply to change the price as he likes.
  2. The monopolist cannot determine both the quantity and price he wishes to sell. He can only control whichever of the two he wishes and leaves the consumers to control the other.
  3. The monopolist is known to make abnormal profits and exploit consumers.
  4. Entry into the market is highly restricted.
  5. There is no substitute for the goods and services.

Types of monopolies 

  1. State monopolies: These are those that emerge as a result of government legislations that give firms the exclusive privilege to be the sole producers or suppliers of certain goods and services.
  2. Natural monopolies: These are firms, which given the nature of their output (which requires large scale investments) have turned out to be natural monopolies either on account of their efficiency or uniqueness in the design of their products or sourcing of raw materials. 

Causes of monopoly 

  1. Single ownership of a factor of production i.e. sole ownership of a large deposit of raw materials or possession of a unique or rare skill by a surgeon or a dentist in a community.
  2. Conferment by law of import licenses for scarce materials and patent rights given only to certain firms or legally recognized professional organizations e.g. Nigeria Bottling PLC, the only producer of Coca-Cola in Nigeria.
  3. Pioneering establishment of a project that involves high initial cost or investment which will make entry difficult to potential competitors e.g. Iron and Steel Industry.
  4. Superior operational efficiency in production and marketing which enables a company to take over other firms in the industry, e.g. Nigerian Breweries Company PLC.
  5. Acquisition of copy rights that makes the producer the only supplier of his products within a given period e.g. books published by University Press PLC.

Price and output determination under monopoly 

Being the sole supplier or producer of a product , a monopolist can either have full control over the price he charges for his product or the quantity he wishes to sell. He can control either the price or the quantity but not both. 

Market Structures

In the diagram above, the marginal revenue curve (MR) and the average revenue curve (AR) of a monopoly firm are shown to be different from what they look like under perfect competition. The AR curve is shown to be different from the MR curve because in order for a monopolist to be able to sell extra units of his product, he has to lower his price which means a fall in his marginal revenue and vice versa. That is why at all times the marginal revenue curve and the demand curve are not the same, as shown in the diagram. The equilibrium level of output is determined at point E where marginal cost and marginal revenue are the same. The monopolist will however charge a price (M) making an excess profit represented by a rectangle (PMTE). This means that marginal revenue is no longer equal to price as is obtained under perfect competition. 

Advantages of monopoly 

  1. State monopolies can provide goods and services at relatively subsidized prices to enhance citizen’s welfare.
  2. It can eliminate excess capacity and allow the reaping of economies of scale which may lower the cost of production and eventually benefit the consumers.
  3. A monopolist has an incentive to engage in research and development since it has larger resources and an established market.
  4. The existence of monopoly firms reduces the need for excessive advertising and violent price-war.
  5. Trade unions, professional associations by virtue of their monopolistic positions are able to maintain high standards of living and enhance the remuneration of members. 

Disadvantages of monopoly 

  1. Under-utilization of societal resources. In order for a monopolist to charge the monopoly price, he may supply fewer products into the market thereby under-utilizing labor and other productive resources.
  2. Monopolists sometimes reduce the welfare of the consumers by charging them exploitative prices.
  3. Lack of competition may lead to inefficiencies e.g. poor services and lack of enterprise.
  4. A feeling of complacency on the part of a monopoly can lead to degeneration in technical progress, research and innovation.

Control of monopoly 

The following points are some of the measures that can be used to curtail or eliminate the power of monopoly:

  1. Taxing the excess profit.
  2. Nationalizing or privatizing the industry.
  3. Legislation to regulate or fix prices of monopoly products and prices of factors of production.
  4. Reduction or elimination of import duties, tariffs and other quantitative restrictions on trade. 

Duopoly

This is a market structure with only two producers or sellers of a product . 

Oligopoly

This is a market structure characterized by few sellers or producers. It is categorized as either a collusive oligopoly like OPEC or non-collusive in which case they make no attempt to come together as a group.

Monopolistic competition 

A monopolistic market has one main seller but many buyers. The seller can influence either price or supply but not both.

Main features 

  1. There is heterogenous production in a monopolist market.
  2. Entry to the market is restricted.
  3. The cost structure is unique to the producer.
  4. There may be transport costs.
  5. The demand curve for its product slopes downwards.

If you have any question or suggestion on Market Structures, kindly drop it in the comment box below!

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By Teezab

His name is Tiamiy Abdulbazeet. He is a writer and loves to write about Education, and all types of news. If he is not writing, then know that he is playing a game!ūüėÉ

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