Features of the 4 basic market structures

Aims: By the end of this chapter, you should be able to
I. distinguish and provide the features of different market types, &
II. give precise definition to terms highlighted in red bold-face.

Market Type

Pure Competition

Monopolistic

Oligopoly

Pure Monopoly

Number of firms

Very large

Many / several

Few

One

Type of product

Standardized/ homogeneous

e.g. graded grains, teas, crude oil, iron, etc.
See definition of Commodity below.

Differentiated

-many brand names

e.g. shoes, dresses, restaurants

Standardized (to some extent steel & petroleum) or differentiated (e.g. electrical appliances, cars, etc. )

Unique

e.g. Sole copyright holder or local utility provider.

Conditions of entry

Very easy, no obstacle; unrestricted entry

Relatively easy

Restricted

(by copyrights, control over natural resources, heavy overhead investment, etc.)

Restricted or completely blocked.

Control over price

None, price taker; Consumer Sovereignty

Some but with rather narrow limits

Considerable with collusion (OPEC)

Considerable, price maker. (complete control over output); Producer Sovereignty.

Non-price competition

None

Advertising, brand names, etc.

A great deal with high degree of product differentiation

Mostly public relation advertising.

Shape of Demand Curve for firm

Horizontal.

Downward sloping but relatively elastic.

Downward sloping & relatively inelastic but depends on reactions from rivals to a price change.

Downward sloping & more inelastic compared to those for Oligopoly.

  1. Perfect competition is a market structure where there are many firms producing identical product, all firms are price takers and have freedom of entry into the industry.
  2. Monopoly is a market structure where there is only one firm in the industry producing a unique product and has ability to set price. There is restricted entry into this industry.
  3. Monopolistic competition is a market structure where there are many firms producing differentiated products with relatively easy entry into the industry. All firms also have some control over price.
  4. Oligopoly is a market structure where there are a few large firms and can create entry barriers to potential new firms. Firms produce differentiated products and can choose to collude to control price.
  5. Product differentiation makes a product different (physically through packaging or psychologically through advertisement) to another produced by competing firms.
  6. Imperfect competition refers to monopolistic competition and oligopoly where there the level of competition in the market has not reached that of Perfect competition.
  7. Consumer sovereignty is a situation in which consumers determine the types and quantities of goods and services that get produced from the scarce resources of the economy. Consumers' demand has a great deal of influence over price and output. Firms respond to changes in consumer demand without having the ability to change the long run price above average cost. You can think of this situation as consumers voting with their money for what goods and services needed to be produced by the economy.
  8. In contrast to consumer sovereignty, Producer sovereignty is a situation where producers decides what to produce and sets its price. This often involves producer trying to convince consumers to buy the product through advertisement.
  9. Monopsony is a market structure in which there is one buyer and many sellers. For example, Del Monte could be the only buyer of all banana produce in a certain region in the Philippines. In this case, Del Monte is a monopsony.
  10. Just observing the number of firms in a industry will not tell us much about the level of competition within the industry. There could be a 1000 firms in the industry but the largest 2 firms may produced 90 per cent of total industrial output. This scenario characterized the soda drink industry in many countries. We thus need to look at the degree of concentration in the industry.
  11. The simplest measure of industrial concentration is the ratio of the market share of the largest three or five firms to that of the industry. These are known as the "3-firm concentration ratio" and "5-firm concentration ratio" respectively.
  12. In the UK (2001), the 5-firm concentration ratios for Chilled Indian ready meals is 89%, Record companies 74%, Book publishing 37% and Bottled Sparkling water 35%. The 3-firm concentration ratio in UK (2001) for Chocolate Manufacturers is 76% and Breakfast Cereal is 69%.
  13. The degree of concentration is determined by
    (a) barriers of entry that prevents or impedes potential new firm from joining the industry and thus limits the amount of competition among existing firms,
    (b) high transport costs, and
    (c) historical accidents.
  14. Having said that in a globalised economy, a country that trades with other nations also exposes its own industries, no matter how concentrate, to competition from abroad. For instance, although the five largest record companies in the UK controlled almost 74% of the industry, these firms still face competitions from overseas record companies as well as online music sale.
  15. Firm concentration ratios are not limited to within a country. Below is an estimate from Christian Aid (1992):

Commodity

cereal

banana

cocoa

tea

tobacco

No. of transnational companies

5

3

3

3

4

% market share in world commodity trade

77

80

83

85

87


Commodity is a good that is either extracted from nature (e.g. gold and oil) or grown on the land (e.g. tea and banana). A commodity that is extracted from nature is also called hard commodity and a good that is grown on the land is known as soft commodity.