A market structure refers to the organizational and other interconnected characteristics of a market such as the ease of entry and exit, level of competition, the forms of product differentiation, the number of buyers and sellers as well as their strength especially as regards pricing. There are four major classifications under market structures, they include; perfect competition, monopolistic competition, oligopoly and monopoly. They each form a generic representation of a certain real market.
A perfectly competitive market structure is where there are many firms in the market, the products are relatively homogenous, there’s perfect knowledge and there’s free entry and exit from the market. The key observable feature is that each firm and consumer is a price taker since the prices are determined in the market. No one of them can influence the commodity prices unilaterally. If any of the firms decide to increase their price consumers will switch and start purchasing the competitor’s goods at better price thus the firm that set the higher price loses its market share as well as profits. With this in mind, it means that the individual firms are all faced with a demand curve that is horizontal. The marginal cost for these firms is thus equal to the price.
A monopolistically competitive market structure represents the ideal benchmark of the perfect competition that is offered by the real world. It has a large number of relatively small firms; each is relatively small in comparison with the overall market size, it comprises of differentiated products, it is relatively easy for firms to enter or exit, the knowledge with regard to pricing and technology is relatively extensive. Even though the firms in this market are extremely competitive, they each retain some slight degree of control in the market. This kind of a market is structure deemed to be a kind of hybrid between a monopoly structure and perfect competition. The goods sold are similar but not identical; they are close substitutes.
An oligopoly is a market structure with a few large firms that are closely interdependent. Often there are barriers to entry. The products in this market are either identical or differentiated. Lastly, a monopoly is a market structure that is characterized by only one seller who deals in a product with no close substitutes. This single seller is the price maker and exercises control over the commodity’s supply. The firm is thus the industry and there’s no free entry and exit as there are certain restrictions. The demand curve for the firm is downward sloping.
Within the market structures, there are certain times when the market is not perfectly efficient and thus result in market failure. Market failure occurs when there’s a deficiency to the attainment of particular desired ends. To this end, there are levels whereby certain market players call upon the government to correct certain market difficulties experienced. Government regulation in these markets usually occur when there’s existence of undesirable market structures, when it is necessary that a certain natural resource be conserved and used efficiently, when there are negative economic externalities associated with a given firm’s practices, when a certain firm’s activities are deemed socially undesirable or when it is desired that the power of certain large blocs be diluted or controlled.
Government may intervene in a market system by influencing the price mechanism as a measure to alter resource allocation with an objective of ensuring there’s improvement in welfare, both social and economic. Market failure may be due to lack of information in the market and the government may take up the role of ensuring there are no information gaps. Government regulation through competition policy for example might be against certain anti-competitive tendencies such as those by price-fixing cartels. Setting of price-floors in the labor market or limiting the number of working hours by the government also has an effect on markets.
Organizations in the private sector seeking to maximize profits generally will attempt to maximize their revenues and minimize their costs. Revenue comprises both price and the output sold as components. What determines the price that firm charges for its product will largely depend on the market structure that the firm is operating in. Barriers to competition arising from anti-competitive behaviors or barriers to entry in markets are a common phenomenon in most countries. Unnecessary entry barriers should be eliminated to ensure new firms can join the market when they see opportunities. Exit barriers should as well not be excessive so as to allow firms to exit when they feel they cannot operate. Firms in the private sector dealing in the same product can as well merge and come up with a cartel with the objective of raising prices and reducing output.
The major source of government revenue is taxation. Both sellers and buyers pay taxes to the government. For competitive markets, a unit tax on top of the price of a given good will have the effect of increasing the price that buyer’s will pay, and also lower the seller’s price. The effect to government revenue is deadweight loss which is a loss to society as it is not captured in the revenue collected by government.
References
Baumol, W. J., & Blinder, A. S. (2011). Economics: Principles and Policy (12 ed.). London: Cengage Learning.
McConnell, C. R., & Brue, S. L. (2012). Microeconomics: principles, problems, and policies (19 Edition ed.). New York: McGraw-Hill/Irwin.
