Market Structure Meaning

• Market structure refers to the way that various

industries are classified and differentiated in accordance
with their degree and nature of competition for products
and services.
• It consists of four types: perfect competition,
oligopolistic markets, monopolistic markets, and
monopolistic competition.

01 /
Market Features
• A market is a venue where buyers and sellers can meet to
facilitate the exchange or transaction of goods and services.
• Markets can be physical, like a retail outlet, or virtual, like an e-
retailer.
• Other examples include illegal markets, auction markets, and
financial markets.
• The prices of goods and services in a market are determined by
supply and demand.
• Features of a market include the availability of an arena, buyers
and sellers, and commodities.
01 /
Market types
• According to economic theory, market
structure describes how firms are
differentiated and categorized by the
types of products they sell and how
those items influence their operations.
• A market structure helps us to
understand what differentiates markets
from one another.
01 /
Perfect Competition
• Perfect competition or pure competition is an idealized market
condition where many sellers compete to offer the best prices and
large sellers have no advantages over smaller ones. Perfect
competition rarely occurs in real-world markets but it provides a
useful model for explaining how supply and demand affect prices
and behavior in a market economy.
• There are many buyers and sellers in perfect competition and
prices are determined purely by supply and demand. Companies
earn just enough profit to stay in business and no more. Other
companies would enter the market and drive profits down if they
were to earn excess profits.
01 /
How Perfect Competition Works
• Perfect competition is a benchmark or ideal type to which
real-life market structures can be compared. Pure
competition is theoretically the opposite of a monopoly in
which only a single firm supplies a good or service. That
firm can charge whatever price it wants because consumers
have no alternatives and it's difficult for would-be
competitors to enter the marketplace.
• There are no monopolies in a perfect competition model

01 /
Characteristics of Perfect
Competition
This kind of structure has several key characteristics:
• All firms sell an identical product. It's a commodity or homogeneous.
• All firms are price takers. They can't influence the market price of
their products.
• Market share doesn't influence prices.
• Buyers have complete or perfect information about the product
being sold and the prices charged by each firm in the past, present,
and future.
• Capital resources and labor are perfectly mobile.
• Firms can enter or exit the market without cost.
01 /
 Monopoly
• A Monopoly is a market structure with a single
seller or producer that assumes a dominant
position in an industry or a sector.
• Monopolies are discouraged in free-market
economies because they stifle competition, limit
consumer substitutes, and thus, limit consumer
choice.

01 /
Features of Monopoly
• A monopoly is a market structure that consists of a single
seller or producer and no close substitutes.
• A monopoly limits available alternatives for its product and
creates barriers for competitors to enter the marketplace.

• Monopolies can lead to unfair consumer practices. They are

discouraged in free market economies.
• Some monopolies, such as those in the utility sector, are
government regulated.
01 /
Types of Monopolies
The Pure Monopoly
• A pure monopoly is a single seller in a market or sector and high
barriers to entry, such as significant startup costs. There are no
substitutes for the product sold by the seller.

01 /
 Monopolistic Competition

• Multiple sellers in an industry sector with similar

substitutes are defined as having monopolistic
competition. Barriers to entry are low, and the competing
companies differentiate themselves through pricing and
marketing efforts.
• Their offerings are not perfect substitutes, as with Visa
and MasterCard. Other examples of monopolistic
competition include retail stores, restaurants, and hair
salons.
01 /
The Natural Monopoly

• A natural monopoly develops from reliance on

unique raw materials, technology, or specialization.
Companies with patents or extensive research and
development costs, like pharmaceutical companies,
are considered natural monopolies.

01 /
Public Monopolies

• Public monopolies, such as the utility industry,

provide essential services and goods. Only one
company commonly supplies energy or water to a
region. The monopoly is allowed and heavily
regulated by government municipalities. Rates and
rate increases are controlled.

01 /
Pros and Cons of a Monopoly

Pros
• Without competition, monopolies can set prices and keep pricing
consistent and reliable for consumers.
• Monopolies enjoy economies of scale and often are able to produce mass
quantities at lower costs per unit.
• Standing alone as a monopoly allows a company to securely invest in
innovation without fear of competition.
Cons
• A company that dominates a sector or industry can use its advantage to
create artificial scarcities, fix prices, and provide low-quality products.
• Due to limited or unavailable substitutes in the market, consumers have no
option but to trust that a monopoly operates ethically.
01 /
Monopolistic Competition
• Monopolistic competition, also called competitive
market, where there is a large number of firms, each
having a small proportion of the market share and
slightly differentiated products.
• Monopolistic competition exists when many companies offer
competing products or services that are similar, but not perfect
substitutes.
• The barriers of entry in a monopolistically competitive industry
are low, and the decisions of any one firm do not directly affect its
competitors. Competing companies differentiate themselves
based on pricing and marketing decisions.
01 /
 Features of Monopolistic
competition
• Monopolistic competition occurs when many companies
offer products that are similar but not identical.
• Firms in monopolistic competition differentiate their
products through pricing and marketing strategies.
• The costs or obstacles that prevent new competitors from
entering an industry are low in monopolistic competition.

01 /
Understanding Monopolistic
Competition
• Monopolistic competition exists along the spectrum between a
complete monopoly and perfect competition, combining elements from each.
• Restaurants, hair salons, household items, and clothing are examples of
industries with monopolistic competition. Items like dish soap or hamburgers
are sold, marketed, and priced by many competing companies.
• Demand is highly elastic for goods and services of the competing companies
and pricing is often a key strategy for these competitors. One company may
opt to lower prices and sacrifice a higher profit margin, hoping for higher
sales. Another may raise its price and use packaging or marketing that
suggests better quality or sophistication.

01 /
Pros and Cons of Monopolistic
competition
Pros
• Few barriers to entry for new companies
• Variety of choices for consumers
• Company decision-making power for prices and marketing
• Consistent quality of product for consumers
Cons
• Many competitors limits access to economies of scale
• Inefficient company spending on marketing, packaging, and advertising
• Too many choices for consumers means extra research required
• Misleading advertising or imperfect information for consumers
01 /
Oligopoly
• Oligopoly is an economic term that
describes a market structure wherein
only a select few market participants
compete with each other. The
competitive dynamics within an
oligopoly are distorted to favor a
limited number of influential sellers.

01 /
Characteristics of oligopoly
• Profit maximization
• Price setting
• High barriers to entry and exit
• Few firms in the market
• Abnormal long-run profits
• Perfect and imperfect knowledge
• Interdependence
• Non-price competition
01 /
Features of Oligopoly
• An oligopoly is defined as a market in which the industry is dominated by a
few companies that are each influential participants in the market.
• There is no precise number of companies that qualifies a market as an
oligopoly. But as a rough guideline, the number of sellers must exceed two
yet be fewer than about five.
• The oligopoly market structure forms from a limited number of
companies possessing a substantial portion of the market, coupled
with stiff competition and high barriers to entry.
• Over time, the competition within the market reduces, resulting in only a
handful of competitors controlling the market.
• Since a market characterized as an oligopoly consists of just a few
competitors, the decisions of each company directly influences the decisions
of the rest of the market participants.
• Given those market conditions, it should be intuitive as to why the formation
of an oligopoly can easily become corrupt (and the participants are prone to
collusion).
01 /
Types of Oligopoly
Pure oligopoly
• Also known as a perfect oligopoly, this occurs when the products are
homogeneous, such as in the steel, aluminum, cement, or
telecommunications industries.
Imperfect oligopoly
• Also known as a differentiated oligopoly, this occurs when the
products are differentiated, such as in the cars, paints, laptops, or
cell phone industries.
Collusive oligopoly
• This occurs when firms agree to limit competition, such as by setting
prices and production rates.
Noncollusive oligopoly
• This occurs when there is no agreement between the firms, such as
when a market has a limited number of companies due to high
startup costs.
01 /
Partial oligopoly
• This occurs when one large firm dominates the industry
and controls prices.
Full oligopoly
• This occurs when there is no price leadership.
Open oligopoly
• This allows new firms to enter the market, but they may
face a disadvantage against established firms.
Closed oligopoly
• This restricts competition from entering the market
01 /
Kinked Demand Curve
• The kinked demand curve is a graphical representation of the price-
quantity relationship in an oligopoly, a market structure with a small
number of firms that can influence the market price.
• The kinked demand curve shows the interdependent behavior of
firms in an oligopoly and explains the stability of prices in these
markets:
• A demand curve that has a kink at the current market price, with
different degrees of elasticity at different price levels
• Firms in an oligopoly will be more likely to maintain their prices if
their rival raises its price, but will be more likely to lower their own
prices if their rival lowers its price
• Firms are reluctant to raise or lower prices, leading to price stability
and price stickiness
01 /
Graphical Representation of Kinked
Demand Curve

01 /
 Module 4
MARKET STRUCTURE
• DR [Link], MA(EC0), MBA, PH.D.
• PROFESSOR & HOD,
• DEPARTMENT OF BUSINESS ADMINISTRATION,
• INDIAN ACADEMY DEGREE COLLEGE-AUTONOMOUS
• BANGALORE.
• [Link]@[Link]
• [Link]

01 /
•The kinked demand curve model
was developed by American
economist Paul Sweezy.
•However, some economists, such
as George Stigler, have criticized
the model, arguing that it's not
useful or predictive
01 /
Example of a modern oligopoly
Is the U.S. airline industry, where four carriers hold in
excess of 2/3 of total market share.
The four airline carriers are as follows:
[Link] Airlines (AAL)
[Link] Air Lines (DAL)
[Link] Airlines (LUV)
[Link] Airlines (UAL)
• Because each of these airlines’ market shares is
relatively similar, they form an oligopoly rather than a
monopoly.
01 /