{"id":46257,"date":"2023-09-05T11:17:45","date_gmt":"2023-09-05T11:17:45","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=46257"},"modified":"2026-01-24T18:16:07","modified_gmt":"2026-01-24T18:16:07","slug":"identifying-the-type-of-market-structures","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/","title":{"rendered":"Identifying the Type of Market Structures"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Market Structure with Only One Buyer\",\n    \"text\": \"Which of the following best describes a market structure with only one buyer?\\n\\nA. Monopoly.\\n\\nB. Monopsony.\\n\\nC. Monopolistic competitive market.\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Monopsony.\",\n      \"explanation\": \"A monopsony is a market structure characterized by a single buyer. A monopoly, by contrast, has one seller and many buyers, while monopolistic competition involves many buyers and many sellers.\"\n    }\n  }\n}\n<\/script>\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Market Concentration Ratio and HHI\",\n    \"text\": \"If a market has 5 suppliers and each of the top two suppliers holds 20 percent of the market share, which of the following best represents the concentration ratio for the top 2 suppliers and their respective HHI?\\n\\nA. Concentration ratio = 4%; HHI = 40.\\n\\nB. Concentration ratio = 40%; HHI = 0.08.\\n\\nC. Concentration ratio = 40%; HHI = 0.4.\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Concentration ratio = 40%; HHI = 0.08.\",\n      \"explanation\": \"The concentration ratio for the top two suppliers is calculated by summing their market shares: 20% + 20% = 40%. The Herfindahl\u2013Hirschman Index (HHI) is calculated by squaring each firm\u2019s market share (expressed as a decimal) and summing them. For the two firms: (0.20\u00b2 \u00d7 2) = 0.08.\"\n    }\n  }\n}\n<\/script>\n\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/V0465rIveto\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Monopoly markets and situations where companies hold significant pricing power can result in market inefficiencies, as the monopolies tend to constrain output in order to sell at higher prices. Due to this, many countries have a competition law that regulates the degree of competition in many industries.<\/p>\n<h2>Econometric Approaches<\/h2>\n<p>To gauge market power, one can estimate the elasticity of demand and supply in the market. If demand is elastic, the market is close to perfect competition. On the contrary, if it is inelastic, companies may possess market power.<\/p>\n<p>We can use a time series or cross-sectional regression analysis to calculate the elasticity of a market. &nbsp;In a time series analysis, we observe the behavior of a parameter over an extended period, for instance, a company\u2019s annual sales for the last 50 years. Since the market situation may have changed over the chosen period, the estimated elasticity may not reflect the current situation.<\/p>\n<p>A cross-sectional analysis entails analyzing different parameters, probably from different companies, within a specific time period, such as sales from different companies within a year; This may be complicated as it requires a substantial effort to gather data from across all selected companies.<\/p>\n<p>To address these issues, we employ more straightforward metrics, as discussed below.<\/p>\n<h3>Concentration Ratio<\/h3>\n<p>The concentration ratio is the sum of market shares covered by the largest N firms in a market. It is determined by finding the sales value for the largest firms and dividing it by the total market sales.<\/p>\n<p>The ratio lies between zero (for perfect competition) and 100 (for monopolies).<\/p>\n<p>The main advantage of this concentration measure is the simplicity of its calculation.<\/p>\n<h3>Limitations of the Concentration Ratio<\/h3>\n<ol>\n<li>It fails to quantify market power directly, i.e., a high concentration ratio may not necessarily mean that a firm is a monopoly. For instance, a monopoly operating in a market structure with low barriers to entry may be forced to behave (price its products) like a firm operating in perfect competition.<\/li>\n<li>It is not affected by mergers among the top market incumbents. For instance, if the top two companies merge, their combined pricing power will be greater than that of each of the two pre-existing companies. However, the concentration ratio may not change much.<\/li>\n<\/ol>\n<h3>Example: Concentration Ratio<\/h3>\n<p>Suppose there are 10 producing companies in a market. The production percentages for the top three companies are 35%, 20%, and 10%. Calculate the concentration ratio for these three companies.<\/p>\n<h3>Solution<\/h3>\n<p>The concentration ratio is the sum of market shares covered by the largest N firms. So, the concentration ratio for the first 3 companies are:<\/p>\n<p>Concentration ratio = 35% + 20% + 10% = 65%<\/p>\n<h3>The Herfindahl\u2013Hirschman Index (HHI)<\/h3>\n<p>The HHI first squares the market shares of the top N companies, then sums them up. The HHI is 1 for a monopoly firm, and &nbsp;for M firms with equal market share.<\/p>\n<p>The HHI was developed to try to curb some of the limitations of the concentration ratio.<\/p>\n<h3>Example: Herfindahl\u2013Hirschman Index (HHI)<\/h3>\n<p>Using the same example as above, the HHI for the top three companies can be calculated as:<\/p>\n<p>HHI = 0.35<sup>2<\/sup> + 0.20<sup>2<\/sup> + 0.10<sup>2<\/sup> = 0.1725<\/p>\n<h3>Limitations of the HHI<\/h3>\n<ol>\n<li>The HHI does not consider the elasticity of demand; thus, it cannot approximate the potential profitability of a single company or a group of companies.<\/li>\n<li>HHI does not take the possibility of entry into account.<\/li>\n<\/ol>\n<blockquote>\n<h2>Question<\/h2>\n<p>Which of the following best describes a market structure with only one buyer?<\/p>\n<ol type=\"A\">\n<li>Monopoly.<\/li>\n<li>Monopsony.<\/li>\n<li>Monopolistic competitive market.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p><strong>The correct answer is B.<\/strong><\/p>\n<p>A monopsony has only one buyer.<\/p>\n<p><strong>A is incorrect.<\/strong> A monopoly has one seller but many buyers.<\/p>\n<p><strong>C is incorrect.<\/strong> A monopolistic competitive market has many buyers and fairly many sellers.<\/p>\n<h2>Question<\/h2>\n<p>If a market has 5 suppliers and each of the top two suppliers holds 20 percent of the market share, which of the following best represents the concentration ratio for the top 2 suppliers and their respective HHI?<\/p>\n<ol type=\"A\">\n<li>Concentration ratio = 4%; HHI = 40.<\/li>\n<li>Concentration ratio = 40%; HHI = 0.08.<\/li>\n<li>Concentration ratio = 40%; HHI = 0.4.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p><strong>The correct answer is B.<\/strong><\/p>\n<p>The concentration ratio is the sum of the two suppliers&#8217; market share.<\/p>\n<p>Therefore, \\(20\\% + 20\\% = 40\\%\\).<\/p>\n<p>For the HHI, we take \\({0.20}^2 \\times 2 = 0.08\\).<\/p><\/blockquote>","protected":false},"excerpt":{"rendered":"<p>Monopoly markets and situations where companies hold significant pricing power can result in market inefficiencies, as the monopolies tend to constrain output in order to sell at higher prices. Due to this, many countries have a competition law that regulates&#8230;<\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-46257","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Identifying Market Structures | CFA Level I Economics<\/title>\n<meta name=\"description\" content=\"Learn how to identify market structures using real business examples. Covers monopoly, oligopoly, monopolistic competition, and perfect competition. Read more.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Identifying Market Structures | CFA Level I Economics\" \/>\n<meta property=\"og:description\" content=\"Learn how to identify market structures using real business examples. Covers monopoly, oligopoly, monopolistic competition, and perfect competition. Read more.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2023-09-05T11:17:45+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-01-24T18:16:07+00:00\" \/>\n<meta name=\"author\" content=\"Kajal\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Kajal\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"3 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/\"},\"author\":{\"name\":\"Kajal\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/3cde53d128c8d0cfdd46d8732e8c3048\"},\"headline\":\"Identifying the Type of Market Structures\",\"datePublished\":\"2023-09-05T11:17:45+00:00\",\"dateModified\":\"2026-01-24T18:16:07+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/\"},\"wordCount\":675,\"articleSection\":[\"Economics\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/\",\"name\":\"Identifying Market Structures | CFA Level I Economics\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2023-09-05T11:17:45+00:00\",\"dateModified\":\"2026-01-24T18:16:07+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/3cde53d128c8d0cfdd46d8732e8c3048\"},\"description\":\"Learn how to identify market structures using real business examples. Covers monopoly, oligopoly, monopolistic competition, and perfect competition. Read more.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Identifying the Type of Market Structures\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/3cde53d128c8d0cfdd46d8732e8c3048\",\"name\":\"Kajal\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/12\/tarryn-150x150.png\",\"contentUrl\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/12\/tarryn-150x150.png\",\"caption\":\"Kajal\"},\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/kajal\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/V0465rIveto\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"2560\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2023-09-05T11:17:45+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Identifying Market Structures | CFA Level I Economics","description":"Learn how to identify market structures using real business examples. Covers monopoly, oligopoly, monopolistic competition, and perfect competition. Read more.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/","og_locale":"en_US","og_type":"article","og_title":"Identifying Market Structures | CFA Level I Economics","og_description":"Learn how to identify market structures using real business examples. Covers monopoly, oligopoly, monopolistic competition, and perfect competition. Read more.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2023-09-05T11:17:45+00:00","article_modified_time":"2026-01-24T18:16:07+00:00","author":"Kajal","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Kajal","Est. reading time":"3 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/"},"author":{"name":"Kajal","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/3cde53d128c8d0cfdd46d8732e8c3048"},"headline":"Identifying the Type of Market Structures","datePublished":"2023-09-05T11:17:45+00:00","dateModified":"2026-01-24T18:16:07+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/"},"wordCount":675,"articleSection":["Economics"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/","name":"Identifying Market Structures | CFA Level I Economics","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2023-09-05T11:17:45+00:00","dateModified":"2026-01-24T18:16:07+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/3cde53d128c8d0cfdd46d8732e8c3048"},"description":"Learn how to identify market structures using real business examples. Covers monopoly, oligopoly, monopolistic competition, and perfect competition. Read more.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/identifying-the-type-of-market-structures\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Identifying the Type of Market Structures"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/3cde53d128c8d0cfdd46d8732e8c3048","name":"Kajal","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/12\/tarryn-150x150.png","contentUrl":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-content\/uploads\/2016\/12\/tarryn-150x150.png","caption":"Kajal"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/kajal\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/V0465rIveto","og_video_type":"text\/html","og_video_duration":"2560","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2023-09-05T11:17:45+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/46257","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=46257"}],"version-history":[{"count":8,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/46257\/revisions"}],"predecessor-version":[{"id":58304,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/46257\/revisions\/58304"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=46257"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=46257"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=46257"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}