MARKET STRUCTURE
Market Structure is the way in which industries are classified and differentiated according to the nature and intensity of competition for goods and services within them. It gives insights over how the firms in a particular industry relate to themselves, to their buyers, and the dynamics of the market as a whole. Market structure plays an important role in defining the strategies firms use, pricing, and even levels of innovation in a given industry.
Types of Market Structures
The four major types of market structures include perfect competition, monopolistic competition, oligopoly, and monopoly.
Perfect Competition
In a perfectly competitive market, numerous small firms sell identical, or homogeneous, products. With so many competitors in the market, no single firm can influence the market price since prices are decided in a supply-demand equilibrium. The entry and exit structure is relatively easy in this structure because firms can join or leave the industry without significant obstacles. All firms sell the same product. As such, the companies have little control over prices. They usually work on less margins. Firms may try to raise the price, but a customer would be shifted to those firms which sell the product at the market price. If a company lowers its price it may sell more but would probably not recover the costs. Because perfect competition offers minimal incentive to innovate or differentiate the product, such market structure is very scarce in real life. An example of such a market is when there are various vendors selling tomatoes at a farmers’ market, selling essentially homogeneous products.
Monopolistic Competition
Monopolistic competition combines features of both monopoly and perfect competition. Despite having many firms, they sell similar but not identical products, and thus, possess a small degree of market power. This difference is distinguished through quality, brand, or other differences. Therefore, firms are able to charge more than the average level without losing all the consumers because the consumers are willing to pay for distinctive attributes. However, if prices are kept too high, customers can easily opt for substitutes. This is because the nature of this market happens to be very competitive, and firms will always look for ways to attract consumers by differentiating through product variation, advertising, or other innovative features. For instance, Stylized Products can sell hair brushes with unique designs that appeal to a particular niche. There are other hair brushes sold in the market, but customers would be prepared to pay a little more for such unique products to keep the company priced as is desired.
Oligopoly
An oligopolistic market is one in which there are a small number of large firms in the industry. Oligopolistic markets are also often in one industry, so all firms are selling the same product. High startup costs, patents, or established brand loyalty make an oligopolistic market unattractive to new firms; it is easier to enter an oligopolistic market than a monopoly. Oligopolistic firms may sell identical or differentiated products, but their decisions significantly influence each other. Other firms tend to follow one firm’s action if this firm changes its pricing because it then must try to match the first firm’s change in order to remain competitive. Companies in oligopoly tend to cooperate, either overtly or tacitly, in maintaining a level of prices and profits. It may even curb aggressive competition that could otherwise cause more intense price wars and lower profits. For instance, ABC Airlines is among few airline companies in its country, each with different levels of price, depending on their given services. High entry barriers in the form of aircraft and airport infrastructure limit new entrants, thereby letting the existing firms maintain substantial market control.
Monopoly
A monopoly exists when one firm supplies the entire market. Because of the very high entry barriers created by patents, resource control, or significant initial costs, no other firms will compete. As the only provider, a monopolist has much pricing power and can set a price higher than what would prevail in a competitive market. But monopolies can at times be unfavorable to the consumer as the lack of competition might end up raising prices and highly limiting product choices. Governments sometimes have monopolies in services that are deemed essential to consumers; they use antitrust laws to confront unfair practices like price-fixing or division of market by such monopolies. Indian Railways is one company, after investing in costly infrastructure in putting up their power lines to a town, is the only supply source. Though railways theoretically have full control of pricing, government oversight helps in ensuring that prices are fair and not taken advantage of by the firm just because of its favorable market position.
Importance of Market Structure
Strategic Decision-making: The form of a market determines how a firm will strategize. For instance, oligopolists consider a likely reaction by their competitors, while monopolistic competitors strategize as to make their products unique.
Pricing Power: A firm’s pricing power depends on the market structure. In monopoly, prices are determined by the firm. Firms in perfect competition cannot manipulate prices and are followers of the market price.
Innovation and Differentiation: Where competition is not that high for example, in a monopoly environment, it may be less of an incentive to innovate. In the case of monopolistic competition, firms would find the motivation to differentiate and innovate for them to garner more market share.
Market Entry and Exit: The nature of the competition also affects entry barriers. In general, when there is perfect and monopolistic competition, the entry barrier is less, but that is not the case for oligopolies and monopolies.
