Type of Market Structure within which a Firm Operates

Economists focus on the nature of competition and the pricing model in a particular market for describing a market structure. Since how firms price their products depends on the market structure, pricing, therefore, depends on competition. A market structure can often be seen as the number of firms that produce identical goods or services in a market.

Factors that Influence the Behavior of Individual Firms

The structure of a market has a big influence on the behavior of individual firms. This influence is mainly in terms of pricing.

The market structure also affects how different goods are supplied, as well as barriers to entry. Remember that barriers to entry are high for monopolies but non-existent in perfect competition.

Efficiency also has some influence on the behavior of different market structures. Firms under perfect competition exhibit the highest level of efficiency whereas monopolies are the least efficient from an economic standpoint.

Features for Identifying a Market Structure

Number of firms under a given market

monopoly type of market will only have one producer in the whole market. An oligopoly will exist where there are several firms producing the same goods. A duopoly is made up of only two firms in the market. For a monopsony, there exists only one buyer. Most monopsonies tend to be government-based, such as the military industry.

The concentration ratio of a firm or company

The concentration ratio lies between zero (for perfect competition) and 100 (for monopolies).

The amount and nature of market costs

This feature covers the economies of scale and sunk costs (cost incurred which the firms can no longer recover), if any.

The degree of vertical integration

Vertical integration refers to the process where different production stages and distribution stages are combined so as to be managed by one enterprise. This is often seen in a monopoly – the manufacturing firm is also the ditributor, the retailer, and the one responsible for after sales services.

The level of product differentiation

The existence of relatively large firms selling differentiated products is referred to as monopolistic competition. On the other hand, only a few sellers selling basically the same product, such as in the oil industry, is referred to as oligopolistic competition.

Demand elasticity

A market exhibiting inelasticity in demand entails firms in a monopoly market. On the other hand, when there is a perfectly elastic demand curve, firms operating in such a market are in perfect competition with each other.

perfectly-elastic-demand

perfectly-inelastic-demand

Question

Which of the following best describes a market structure with only one buyer?

A. Monopoly

B. Monopolistic competitive market

C. Monopsony

Solution

The correct answer is C.

A monopsony has only one buyer.

Option A is incorrect. A monopoly has one seller but many buyers.

Option B is incorrect. A monopolistic competitive market has many buyers and fairly many sellers.

Reading 13 LOS 13h:

Identify the type of market structure within which a firm operates

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