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Market structure

From Wikipedia, the free encyclopedia

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  • ✪ Episode 25: Market Structures
  • ✪ Introduction to Market Structure
  • ✪ Understanding Market Structure to Find the Next Move - Forex Markets
  • ✪ Structure Based Trading ( episode 1 )
  • ✪ How To Use Market Structure In Trading- A Teen Trader

Transcription

Now, cost curves are always going to look the same, but other elements, like price, revenue, and demand, will differ depending on the market structure that the business operates in. Are there other lots of producers, or only a few? Is my product just like everyone else’s, or is it unique? The characteristics of a market will clue you in as to the type of market structure you're dealing with. Really there is a continuum of market structures. Let's take a look. At one extreme, we have perfect competition. Well, if it's competitive, how many producers are we talking about? A lot. How many is “a lot,” or “a large number”? Economists aren’t really specific about this, but a large number of producers means that there are so many competitors that each one is too small to affect the market. In my mind, I tend to think of maybe 100 or more, so that each competitor has 1% or less of the market. Since nothing you do affects the market, no one really cares what you do, and you are free to make decisions without worrying about how the competition will react. How else can recognize a perfectly competitive market? Besides having a large number of sellers, each of those sellers will be producing exactly the same thing. In perfect competition, the product is identical -- or homogeneous, or non-differentiated -- no matter who produces it. One more characteristic: it’s easy for firms to come and go from the industry; that is, there is free entry and exit. Think about it. This industry has lots of producers. Why? Because it's easy to get in and set up shop. In an industry like this -- lots of producers, all producing exactly that the same thing -- how much market power (where market power is defined as the ability to control the price) does an individual firm have? None. You have no ability to drive the price, because 1) you're so small, and 2) everyone else produces exactly what you do. TIME TO THINK: what would happen if you tried to raise your price? Now let's take a look at the opposite extreme of the market structure spectrum. Instead of a huge number of producers, there's only one producer for the whole market, or a monopoly (the prefix “mono” meaning “one”). Furthermore, the monopolist’s product is unique; there really are no substitutes for this product. Lastly, in a monopolistic industry, entry by other firms it nearly impossible due to the extremely high barriers to entry. We’ll get into this more later, but a barrier to entry could be really high costs, or legal protection like patents or copyrights. Given all of these characteristics -- only one producer, a unique product, and no one else can get into the industry to compete with you -- how much market power (ability to control price) does the monopoly producer have? The monopolist has complete control over the price, within the boundaries of what consumers are willing to pay. Are there other structures? Sure -- in fact, most real-world industries will fall somewhere in the middle ground, not at the theoretical extremes of perfect competition or monopoly. Two of these midrange structures are monopolistic competition and oligopoly. A monopolistically competitive structure is still competitive, so there are still a lot of producers; given there are lots of producers, we can assume that entry into the industry is easy. Unlike perfect competition, however, the products are not exactly the same. Highly similar, yes; highly substitutable, yes; but not identical. Think about, oh, toothbrushes. You go to the store, and there are toothbrushes with square heads, diamond heads, rubber-grip handles, bi-level bristles, toothbrushes that play music, toothbrushes that glow in the dark, even with color indicators that tell you when to buy a new toothbrush. All toothbrushes, all highly similar and highly substitutable, but with slight differences. If I believe, as a consumer, that having a rubber-grip handle helps clean my teeth better, then this differentiation gives the producer a small amount of market power. He/she could raise the price a little bit, and I would still buy that rubber-grip handle toothbrush. If they raise the price too much, though, I'll switch to some other type of toothbrush. An oligopoly? Well the prefix “oli” means “few,” so I'll have a few large producers making up the market, each with a large amount of control, or market power. There are some barriers to entry, so it's hard, but not impossible, to get in. The product in an oligopolistic market can be identical, like the members of OPEC who produce oil, or differentiated, like car manufacturers. Also, the “small number” of producers could be just a handful, like cars, or a couple dozen, like the oil producers. The key is that there are few enough producers that each one has a fairly large chunk of the market; large enough that any individual producer can affect what happens in the market. Because everyone's actions matter, the producers become mutually interdependent; whatever one does affects everyone else. This mutual interdependence actually makes the oligopoly the most complicated type of market structure to operate in. Now that you know something about each market, I have an exercise for you: see if you can come up with real-world examples for each type. What kind of product, or products, would fit the perfectly competitive structure? What about monopolistically competitive? Oligopolistic? What about monopolistic? Have your answers ready, because I'll be asking for your responses in our next class. NEXT TIME: Perfect competition TRANSCRIPT00(MICRO) EPISODE 25: MARKET STRUCTURES

Contents

History

Market structure has historically emerged in two separate types of discussions in economics, that of Adam Smith on the one hand, and that of Karl Marx on the other hand. Adam Smith in his writing on economics stressed the importance of laissez-faire principles outlining the operation of the market in the absence of dominant political mechanisms of control, while Karl Marx discussed the working of the market in the presence of a controlled economy sometimes referred to as a command economy in the literature. Both types of market structure have been in historical evidence throughout the twentieth century and twenty-first century.

Types

The discussion of market structure in free economies as described by Adam Smith is often qualified or discussed in terms of patterns of market organization which serve the buyers and sellers in any particular form of the marketplace. Some types of market structure may be described using several recurrent types of descriptive organizational mechanism which may or may not dominate any particular market over time or at particular points in time, such as;

  • Monopolistic competition, a type of imperfect competition such that many producers sell products or services that are differentiated from one another (e.g. by branding or quality) and hence are not perfect substitutes. In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other. This market structure exists when there are multiple sellers who are attempt to seem different from one another.
  • Oligopoly, in which a market is run by a small number of firms that together control the majority of the market share.
    • Duopoly, a special case of an oligopoly with two firms.
    • Monopsony, when there is only a single buyer in a market.
    • Oligopsony, a market where many sellers can be present but meet only a few buyers.
  • Monopoly, where there is only one provider of a product or service.
    • Natural monopoly, a monopoly in which economies of scale cause efficiency to increase continuously with the size of the firm. A firm is a natural monopoly if it is able to serve the entire market demand at a lower cost than any combination of two or more smaller, more specialized firms.
    • Or natural obstacles, such as the sole ownership of natural resources ,DE beers was a monopoly in the diamond industry for years
  • Perfect competition, a theoretical market structure that features low barriers to entry, identical products with no differentiation, an unlimited number of producers and consumers, and a perfectly elastic (linear) demand curve.[1]

Elements and concerns

The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolistic competitors, monopolists, oligopolists, and duopolists exist and dominate the market conditions. The elements of Market Structure include the number and size distribution of firms, entry conditions, and the extent of differentiation.

These somewhat abstract concerns tend to determine some but not all details of a specific concrete market system where buyers and sellers actually meet and commit to trade. Competition is useful because it reveals actual customer demand and induces the seller (operator) to provide service quality levels and price levels that buyers (customers) want, typically subject to the seller’s financial need to cover its costs. In other words, competition can align the seller’s interests with the buyer’s interests and can cause the seller to reveal his true costs and other private information. In the absence of perfect competition, three basic approaches can be adopted to deal with problems related to the control of market power and an asymmetry between the government and the operator with respect to objectives and information: (a) subjecting the operator to competitive pressures, (b) gathering information on the operator and the market, and (c) applying incentive regulation.[2]

Quick Reference to Basic Market Structures
Market Structure Seller Entry Barriers Seller Number Buyer Entry Barriers Buyer Number
Perfect Competition No Many No Many
Monopolistic competition No Many No Many
Monopoly Yes One No Many
Duopoly Yes Two yes Many
Oligopoly Yes Few No Many
Monopsony No Many Yes One
Oligopsony No Many Yes Few

The correct sequence of the market structure from most to least competitive is perfect competition, imperfect competition, oligopoly, and pure monopoly.

The main criteria by which one can distinguish between different market structures are: the number and size of producers and consumers in the market, the type of goods and services being traded, and the degree to which information can flow freely.

See also

References

  1. ^ "AP Economics Review: 4 Market Structures". ReviewEcon.com. 2016-09-10.
  2. ^ Body of Knowledge on Infrastructure Regulation “Market Structure: Introduction.”

External links

  • Media related to Markets at Wikimedia Commons
  • Microeconomics by Elmer G. Wiens: Online Interactive Models of Oligopoly, Differentiated Oligopoly, and Monopolistic Competition
This page was last edited on 11 May 2019, at 11:49
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