Characteristics of Market Structures

Factors that Influence Market Structure.

1. The number and relative magnitude of firms supplying a product.
2. The extent of product differentiation.
3. The seller’s power over pricing decisions.
4. The strength of the barriers to entry and exit.
5. The extent of non-price competition observed in the market.

There are four types of economic market structures.

1. 1. Perfect competition.
   2. Monopolistic competition.
   3. Monopoly market structure.
   4. Oligopoly market structure.

Perfect Competition

Perfect competition refers to a market with many buyers and sellers, similar products, and substitutes. A good example is agriculture, where all rice farmers sell homogeneous products to consumers.

Characteristics of Perfect Competition

1. 1. There exist a vast number of buyers.
   2. There exists a vast number of sellers willing to supply their products at given market prices.
   3. No single seller or producer is large enough to influence the market price.
   4. Homogeneous products: the products being sold in this market are perfect substitutes for one another. Their quality and characteristics don’t vary from one another.
   5. Perfect information: Every consumer and producer is aware of the market prices and the utility derived from using any of the products.
   6. There are no entry barriers.

Monopolistic Competition

This is a form of imperfect competition, with strong elements from both perfect competition and the monopoly market structure. Monopolist competition market structure includes a notably large number of firms selling differentiated products. The difference lies in branding or, in most cases, quality. This means that the goods are not perfect substitutes for one another but are close substitutes.

An example of this can be clothing, where marketing and branding are the main marks of distinction among different but similar black shirts. Another example would be the fast-food industry, where a burger made by McDonald’s is quite similar to a burger made by Burger King from an economic standpoint. Consumers, nevertheless, usually have a preference between the two chains.

Characteristics of Monopolistic Competition

1. 1. There are many producers and consumers in the market.
   2. There is not one firm that has total control over the price of the market.
   3. Consumers assume that there are non-price differences among the products of competitors.
   4. Few barriers to entry and exit exist.
   5. Producers have some control over prices.
   6. Producers and consumers have no perfect information.

Oligopoly

An oligopoly market consists of a small number of relatively large firms that produce similar but slightly different products. Under oligopolies, there also exist some entry barriers with which other enterprises have to contend. Good examples include industries such as oil & gas, airlines, and automakers.

Characteristics of an Oligopoly

1. 1. Only a few firms operate in the market.
   2. Profit maximization is a condition in this market.
   3. Monopolies set their own prices.
   4. Barriers to entry are high.
   5. Firms make abnormal profits in the long run.
   6. Products may be homogeneous.
   7. There is a relatively small number of firms supplying the market.

Monopoly

A monopoly is a market consisting of a single firm that produces goods with no close substitutes. Often, this market has many entry barriers. For instance, water providers, natural gas, telecommunications, and electricity are often granted exclusive rights to service.

Characteristics of a Monopoly

1. 1. A monopoly is a profit maximizer.
   2. Monopolies are price makers.
   3. Price discrimination: Monopolies can change both the price and quality of their products.
   4. There are very high barriers to entry for other firms.
   5. There is a single seller that controls the whole market.
   6. The government regulates pure monopolies.

Summary of Characteristics of Market Structures

$$ \begin{array}{l|l|l|l|l|l}
{\textbf{Type of} \\ \textbf{Market} \\ \textbf{Structure} } & {\textbf{Number of} \\ \textbf{Sellers}} & \textbf{Product Differentiation} & {\textbf{Barriers} \\ \textbf{to Entry}} & {\textbf{Pricing} \\ \textbf{Power}} & {\textbf{Non-Price} \\ \textbf{Competition} } \\ \hline
{\text{Perfect} \\ \text{competition}} & \text{Many} & \text{Homogeneous/standardized} & \text{Very low} & \text{None} & \text{None} \\ \hline
{\text{Monopolistic} \\ \text{competition}} & \text{Many} & \text{Differentiated} & \text{Low} & \text{Some} & {\text{Advertising and} \\ \text{Product} \\ \text{Differentiation}} \\ \hline
\text{Oligopoly} & \text{Few} & \text{Homogeneous/standardized} & \text{High} & {\text{Some or} \\ \text{Considerable}} & {\text{Advertising and} \\ \text{Product} \\ \text{Differentiation}} \\ \hline
\text{Monopoly} & \text{One} & \text{Unique Product} & \text{Very High} & \text{Considerable} & \text{Advertising}
\end{array} $$

Question

An industry is made up of twenty firms. These firms produce products that easily complement one another, and there are no barriers to entry. This industry can be best characterized as:

1. An oligopoly.
2. A monopolistic competition.
3. Perfect competition.

Solution

The correct answer is C.

Even though there are only twenty firms in the industry, there are no barriers to entry, and the products can easily complement one another (no branding or quality constraints).

Firms voluntarily choose not to enter the market.

A is incorrect. In an oligopoly, barriers to entry are high.

B is incorrect. In monopolistic competition, barriers to entry and exit exist.