Type of Market Structure Within Which a Firm Operates

Type of Market Structure Within Which a Firm Operates

Economists focus on the nature of competition and the pricing model in a particular market when describing a market structure. Since firms price their products based on the market structure, pricing, therefore, depends on competition. A market structure is often 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 mainly revolves around pricing.

The market structure also affects how different goods are supplied, as well as market entry barriers. Remember that market entry barriers 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 efficiency level, whereas monopolies are the least efficient from an economic standpoint.

Features for Identifying a Market Structure

Number of Firms Under a Given Market

In a monopoly, there is only one producer in an entire market. An oligopoly will exist in a market where several firms produce the same goods. Besides, a duopoly is made up of only two firms in a market. And lastly, for a monopsony, there exists only one buyer. Most monopsonies tend to be government-based. A good example is the military.

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 (costs incurred and which the firms cannot recover) if any.

The Degree of Vertical Integration

Vertical integration refers to how different production and distribution stages are combined and put under the management of one enterprise. This is often seen in a monopoly – the manufacturing firm is also the distributor, 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, are in 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.

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop Graduate Admission Exam Prep


    Sergio Torrico
    Sergio Torrico
    2021-07-23
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    diana
    diana
    2021-07-17
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    2021-07-16
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    2021-06-28
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Marwan
    Marwan
    2021-06-22
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    2021-05-10
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.