Types of market structures Q4

Thomas Sim PEA2066

Q.
a) Discuss the characteristics of the following market structure. Support your answer with examples.

i) Perfect competition (5 marks)
ii) Monopolistic competition (5 marks)

b) Monopoly is defined as a market structure where there is only one firm in the industry. For a firm to maintain its monopoly position, there must be barriers to the entry of new firms.

Discuss.

i) The various forms of barriers to entry in monopoly.
ii) The equilibrium position with diagram. (10 marks)

(20 marks, 2012 Q4)

A.
List out four types of market structure by the traditional economic analysis.

  1. Monopoly
  2. Oligopoly
  3. Perfect competition
  4. Monopolistic competition.
Market Structure: Defined
For defining market structure we first need to understand what market is? Market is a place where buyers and sellers meet and exchange goods or services. And now if we extend this concept a little more, there are certain conditions which create the structure of a market. Such conditions can be condensed in the following –
  • Number of Buyers
  • Number of Sellers
  • Buyer Entry Barriers
  • Seller Entry Barriers
  • Size of the Firm
  • Product Differentiation/Homogeneous Product
  • Market Share
  • Competition
The above factors are the quick reference if you need to judge the market structure and under which one particular firm belongs to.
Classification of Market Structure
As there are lot many factors deciding on the market structure, there are lot many variations as well determining the particular market structure in the economy. If we try to explore that individually it might not crystallize our concept.
From the above chart now it’s clear that how the market structure can be defined by the various factors and their way of exercising certain power over the market. However if we consider the gradual increase of competition from least to maximum, we will come up to the following conclusions –
  1. Monopoly
  2. Oligopoly
  3. Monopolistic Competition
  4. Perfect Competition
Now let’s look at some of the examples of all the market structure mentioned above so that the concept can dig into your mind and facilitate in your application of market structure –
Monopoly – Companies which are state owned and entry for other players are not allowed. If we take example from Indian perspective there is one example we can think of is Indian railway which is the monopoly as there is no other contributor exercising in the same market.
Oligopoly – In US and other countries people buy their automobiles from different companies. Here the buyers are many, sellers are few, and competition is high.
Monopolistic Competition – Let’s take a common example. Look around your locality. There are some good numbers of restaurants serving their customers. Though they might be producing same kind of recipes, the branding would be different. And that’s the catch of monopolistic competition. Many buyers, many sellers, almost same product but different branding and fierce competition.
Perfect Competition – Though in concept perfect competition exists, however in real life only near perfect competition can exist. And the staple food and vegetables we buy from the market is perfect competition. However when they start branding they move toward oligopoly.
In case of Monopsony and Oligopsony there are almost no practical examples though they are just the opposite of monopoly and oligopoly respectively (buyers rule).
How Understanding Market Structure Would Help You?
Before reading this article or prior to studying about market structure we could have underestimated the value of comprehending different kind of market structure. But after knowing about them now we can line up with a quite good number of benefits –
  • When we know the market structure it helps us understanding a major chunk about a particular company and which market structure it belongs to. Thus we can measure the market share, forces operating in the same market structure, its competitors, and line of products and range of competition.
  • When we know about a company it helps us in investment. Whether we should go for putting our money into the company or not, how risky the investment could be, how much could we lose and most importantly whether there is any other choice available or not!
  • The study of market structure provides us with a vision which could intuitively tell us what would be the future economy, who would be the market leaders, whose demand would be greater, whose goods or services might become obsolete in the future and what would be the factors which would control the whole market?
  • It facilitates where we are as a buyer or seller. When we know the market structure, we can understand in which side we are as of now? We can also understand that there is any barrier to entry into the market or not, whether there is any influence we can bring into the market place, what kind of market structure we would belong to and a lot more!
  • It gives a general idea about how demand and supply work in a market place and how consumerism can eat away or benefit our ability to live well. Different types of products/services, different kinds of buyers and sellers, their different roles and continuous effort to create better product or to solve a problem would then become more understandable when we acquire the bits and pieces about structures a particular market follows.
In Conclusion
The importance of market structure in an economy cannot be over emphasized as the effect of market structure on an economy, it’s development or degradation is recently been realized. Thus we as the part of the economy need to understand the value of this concept while dealing with others (buyers/sellers) in any market place to yield the optimum benefit and to create win-win situation for all of us.

Ref:
Fintowin verbatim from http://fintowin.com/2011/07/market-structure-monopoly-oligopoly-monopolistic-and-perfect-competition/