Unit four

MARKET. MARKET STRUCTURES AND THEIR KEY CHARACTERISTICS

Learning objectives

After studying this unit, you should be able to:

• define the notions of market and market structures;

• define the terminology related to the market and market structures;

• distinguish between perfect competition, monopolistic competition, oligopoly, and monopoly;

• outline the main characteristics of the principal types of market structures.

Starting up

Task 1. Using the expressions from the table given on page 8, comment on the following quotations.

“Markets change, tastes change, so the companies and individuals who choose to compete in those markets must change.” (An Wang)

“Advice is the only commodity on the market where the supply always exceeds the demand” (Thomas J. Peters)

“Competition is the keen cutting edge of business, always shaving away at costs.” (Henry Ford)

TEXT

Market is an actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods and services. Market is created when there is the seller, the buyer, the price, the product and competition, the cornerstone of the free enterprise system.

In most economic systems consumers and producers exchange their goods and services in many competitive markets. Economists generally agree that there are four major degrees of competition resulting in different market structures. Market structure can be defined in terms of the number and the power of the buyers and sellers, the nature of the product (product differentiation), barriers to entry and exit, and availability of information.

The principal types of market structures are perfect competition, monopolistic competition, oligopoly, and monopoly.

Perfect (or Pure) Competition. The laws of supply and demand operate only under conditions of perfect competition. Perfect competition is the name given to a market structure characterized by the following features.

• There are a lot of buyers and sellers purchasing and selling exactly the same commodity. It means that no one buyer or seller can affect the market price by entering or leaving the market. They can accept the market price or reject it.

• Identical commodity is offered for sale. It denotes that all units of the commodity are the same in the minds of buyers and they must be willing to purchase it from the seller who offers this product at the lowest price.

• Each buyer or seller has perfect knowledge of market prices and quantities meaning that all of them are completely aware of* the prices and quantities at which transactions are taking place in the market. This permits buyers to compete with buyers, and sellers with sellers.

• There are no barriers to enter or exit the market. It means that there must be no obstacles to prevent firms from entering or leaving the particular market at will.

The stock exchanges are good examples of this market structure.

Monopolistic Competition. Perfect competition and perfect competitive markets exist in only a few businesses and industries. In fact, most businesses work very hard to make their products and services special or unique. Such a type of market is called monopolistic competition. It is characterized by:

• a large number of firms producing similar but not identical products;

• product differentiation;

• some restrictions of information about market prices and quantities;

• relatively easy entry for firms.

Sellers do their best to make their goods or services more attractive than the competitors’. The process of creating uniqueness in products is known as product differentiation. It distinguishes monopolistic competition from perfect competition. Brand name, color package, location of the seller, customer service, credit conditions, or the smile of the salesperson can differentiate a product, even if the products themselves are physically equal. Product differentiation benefits buyers by providing them with a way to distinguish between competing goods as well as sellers by enabling them to increase their market power.

Monopolistic competition is found in many industries. Some specific examples include the manufacture of clothing, household goods, shoes, and furniture.

Oligopoly. An oligopoly is a market dominated by a few large suppliers. Breakfast cereals, automobile and computer hardware are examples of industries controlled by oligopolies. It is characterized by:

• A limited number of leading firms producing a particular brand product.

• Interdependence between firms. It suggests that each firm must take into account the possible reactions of other firms in the market when making pricing and investment decisions.

• Barriers to entry. It denotes that competing firms can enter the markets only if they pay the patent holders for permission to use the process or find a new method of production not protected by existing patents.

• Lack of competitive pricing as oligopolists know that if they reduce or increase their prices the competitors will do the same.

Monopoly. A monopoly is defined as a single firm producing a product, for which there are no close substitutes. To put it another way, no other firms produce a similar product. Monopolies have the following qualities:

• A single seller or monopolist who determines supply and has complete control over the market price.

• No close substitutes. The product sold by a monopoly is different from those offered by other firms.

• Barriers to entry. Competing firms are unable to enter the market where a monopoly exists.

Imperfect Competition. Perfect competition, with its many buyers and sellers, all of whom have perfect knowledge of market conditions, rarely exists. Neither does perfect monopoly, wherein buyers, unable to find substitutes, pay a price selected by the monopolist. Thus, in reality, most of the nation’s economic activity occurs under conditions of imperfect competition. This market structure consists of industries and markets that fall in between two extremes of perfect competition and pure monopoly. Professor Joan Robinson referred to this kind of trade as imperfect competition in which sellers had more freedom to determine prices than they had under perfect competition, but less than they had under monopoly.