About the paper
In the words of eminent economist, A.A. Cournot, ‘’ The term market structure refers to the nature and degree of competition in the market for goods and services’’, and this paper is commissioned to discuss various forms of market structure, Perfectly Competitive, Monopoly, Monopolistic and Oligopoly, and how their varied characteristics affect the life of an average consumer and the society as a whole.
Perfectly Competitive Market
In the words of A. Koutsoyiannis’’ Perfect competition is a market structure characterised by a complete absence of rivalry among the individual firms.”
Below discussed in detail are the multiple characteristics of perfectly competitive market:
i) Number and nature of sellers
A perfectly competitive market structure is characterized by large number of sellers who act as a price taker while the prices are fixed by the industry. In other words, all the sellers in this market structure sells the product at the price fixed by the industry and any price over or below the market price will introduce losses for the seller. Important to note, since there are enormous number of sellers in the market, no one seller can readily influence the overall market supply.
ii) Number and nature of buyers
This form of market structure is characterized by large number of buyers of the products, where the buyers do not have any artificial restriction and possess perfect knowledge about the markets. However, since there are enormous amount of buyers in the market, no single buyer has any influence on the market demand.
iii) Homogenous Products
The firms in this form of market structure sells homogeneous or alike products at the price fixed by the industry. In other words, a perfectly competitive market offers close substitutes, i.e. cross elasticity of the products is infinite.
iv)Horizontal Demand Curve
Demand curve faced by an individual firm is horizontal representing perfectly elasticity of the demand for the products. This indicates that the firm can sell any number of units at the market price, but any deviation in price levels, might pull its demand to zero units also.
v) Freedom of entry and exit
The next characteristic of the perfectly competitive market is freedom of entry and exit in the industry. In other words, whenever the firms in the industry are earning super normal profits, attracted by it, new firms can enter the industry and can claim their share of profit, thus pushing the long run equilibrium towards normal profit only. Similarly, if the industry are running into losses, firms are free to leave the industry.
vi) Absence of selling cost
Since all the firms in the industry sells identical product, selling cost or the advertisement costs is nil or negligible.
-Advantages of Perfectly Competitive Market
i) High degree of competition supports efficient allocation of resources and society witness efficient balance between consumer and producer surplus with no deadweight loss.
ii) Freedom of entry and exit ensures normal profit in the long run.
iii)Since price is equal to marginal cost, consumer benefits at large.
-Disadvantages of Perfectly Competitive Market
i)There is no scope of achieving economies of scale by any firm in this industry.
ii)Lack of supernormal profit and existence of perfect knowledge, inhibits any scope of research and development as any new idea will be shares with other market participants.
iii) This form of market structure do not give any buying choice to consumer as every firm sells identical products.
Monopoly
In the words of D. Salvatore ‘’ Monopoly represents that form of market structure in which only a single firms sells a commodity for which there is no close substitute’’
Below discussed in detail are the multiple characteristics of monopoly market:
i) Nature and number of sellers
A monopoly market is characterized by a single seller who owing to exclusivity of his product, is the sole price determinant that can set prices to his maximum advantage. Since the market is run by a single seller, he has a significant influence over the market supply.
ii) Nature of product
The product sold in the monopoly market has no close substitutes. Therefore, the cross elasticity of demand of the products is zero.
iii)Downward Sloping Demand Curve
Important to note, despite of having full control over the market price, the demand curve faced by a monopolist is downward sloping. i.e. more of the product can be sold only at lower level of prices. This does not mean he can set both price and quantity simultaneously. His price is determined by the demand curve once he selects his output level, or once he sets his price, the output level is determined by what quantity consumers will buy at those price levels. However, in any situation, the eventual aim of the monopolist is to earn maximum profits.
iv) Barriers to entry and exit
This form of market structure is represented by barriers to entry and exit where because of high capital investment and legal patents, new firms face restrictions to enter the industry. Similarly, existing firms also face restrictions from the government to exit the industry as it is nearly impossible to look for new supplier momentarily.
-Advantages of Monopoly markets structure
i) Incentive of economies of scale
Since a monopolist dominates the market supply, it is easier for him to achieve economies of scale. However, over time, with increase in output levels, the average cost of production decreases and this can be passed on the consumers through lower level of prices.
ii) Since monopoly allows abnormal profits, it motivates the monopolist to spend more on research and development activities, which eventually introduce the consumers with some innovative technology or product.
-Disadvantage of Monopoly market structure
i) Since a monopolist always produce output at less than competitive output level(MR=MC), this leads to allocative inefficiency in the society. Therefore, a monopoly market structure promotes deadweight loss in the society.
ii) A monopolist always charge higher price than the competitive market structure, thus exploiting the consumers.
Monopolistic Market Structure
In the words of A.A. Cournet ‘’ Monopolistic represents that market structure where the competition is very keen, though not perfect, among many firms that sell differentiated products that are near substitutes of each other’’
Below discussed in detail are the multiple characteristics of monopolistic market structure:
i) Nature and number of sellers
A monopolistic market structure is represented by large number of sellers who sets their own price-output policy. Each seller owns a small portion of the total market output, thus do not have any major influence on the total market supply. However, no seller through its price-output policy can have perceptible effect on the sales of other firms in the industry. In other words, there is no interdependency of the price-output policies amongst the firms and each seller pursue his own independent course of action.
ii) Product Differentiation
This is the most distinguishable feature of the monopolistic market structure where each market participants sells its own products, but product of each seller is close substitute of other. Important to note, product of each seller is distinguishable on aspects like, durability, packaging, design, style, patent, trademark, et cetera. Therefore, products offered are not homogeneous but heterogeneous, where each of the seller has absolutely monopoly in the production and sale of his own product.
iii) High selling costs
Generation of sales in this market structure, where each seller is pushing for cut-throat competition in order to gain maximum market share, is significantly driven by high selling costs related with the advertisements, free sampling, discount coupons, window display et cetera. In other words, in order to make the consumer aware about their product, each firm needs to incur high amount of selling costs.
iv) Freedom of entry and exit
Monopolistic market structure is represented by freedom of entry and exit of the firms in the industry. New firms can enter the industry with their own differentiated products to claim the market share while firms running into losses and unable to lure the customers with their products are free to exit the industry.
v) Downward sloping demand curve
Firms under monopolistic market structure faces downward sloping curve, but the demand curve is relatively more elastic than the monopoly market structure because of availability of the substitute products in the former market structure. However, as discussed before, reduction in price of the product, will have little impact on price-output policy of rival firms as decreased price will attract only few customers.
vi) Non-Price Competition
Another distinguishable feature of this form of market structure is that each firm competes to claim greater market share and profits without any cut in price levels. Each firm tries to lure the customers through differentiated features such as quality, packaging, promotions, et cetera.
-Advantages of monopolistic market structure
i)Differentiation promotes diversity and provides multiple choices to the consumer to maximize his utility.
ii) Since there are no barriers to entry, market remains contestable and this always benefits the consumers who get the most value for his money under such atmosphere.
iii) Monopolistic market structure is more efficient than the monopoly market structure.
-Disadvantages of monopolistic market structure
i) Excessive differentiation can sometime leads to wasteful expenditure which is eventually borne by the customers.
ii) Since firms under monopolistic market structure fix price below marginal cost, and also produce output below the allocative efficient point, it produces deadweight loss in the society through allocative inefficiency.
Oligopoly Market Structure
An oligopoly is a market structure that is represented by few sellers selling homogeneous or heterogeneous products, where the action of firm has a significant influence on the other firm.
Below discussed in detail are the multiple characteristics of oligopoly market structure:
i) Nature and numbers of sellers:
An oligopoly market structure is characterized by few firms that dominates the industry. Since the firms have a significant control over the essential inputs, they can readily affect the overall supply by forming a cartel agreement, which though is an illegal trade practice and attracts severe penalty.
ii) Interdependence
This is another distinguishable feature in the oligopoly market. Important to note, there is recognizable interdependence among sellers in oligopolist market where each firm knows that any change in price, output or any other aspect will be countered by the rival firm in the industry. In other words, each firm is aware of the price and output move of other firm, and how this may affect their profit levels. Therefore, any move by one firm will be counter by the other firm.
iii) Advertisement
The significance of advertising in this form of market structure can be ascertained by the notation by Prof. Baumol, when he said, ‘’ Under oligopoly market structure, advertising can become a life-and-death matter’’. The main reason for such a relevance of advertising in this market structure is mutual interdependence amongst the firms. As we discussed in the previous point, under oligopoly, the fortune of one firm is easily affected by policies of other firms in the industry, and this extends to advertisement policy and customer services. Therefore, if one oligopolist firm spend significant amount on advertising, and other firm in the industry does not match up, the latter will witness customers gradually attracted towards rival’s products. Therefore, if any one firm follows aggressive advertisement and promotion policy, other firms will have to follow the pursuit in order to maintain their existing market share. iv) Barriers to entry and exit
Since the firms in oligopolistic industry owns a significant brand value and incurs enormous amount of capital investment, an indirect barrier to entry is created for the new firms in the long run. Similarly, the existing firms also face restrictions from the government sources to exit the industry as they own significant control over the essential inputs and the market supply.
-Advantages of Oligopolistic Market Structure
i) Firms in oligopolistic industry are able to make supernormal profits which can be used for further research and development, which eventually benefits the consumers.
ii) With control over essential inputs and production process, oligopolistic firms are able to achieve economies of scale over the long run. This leads to fall in average cost of production, which lately benefits consumers only in the form of reduced prices.
iii) This kind of market structure is represented by non-price competition, which again benefits the consumers with a wide choice to choose from.
-Disadvantages of Oligopolistic Market Structure
i)With high possibility of cartels, society as a whole disadvantage for the oligopolistic market structure.
ii) Since firms always produced below efficient level, a deadweight loss is created, which indicates inefficient allocation of resources in the society.
iii) Small market participants may not be able to propose or work on their creative ideas as they are unable to overcome the control of major market players. In other words, small firms needs to wait for market players to adopt a strategy and then start working on it.
iv) New and capable firms are unable to enter the market because of high barriers to entry
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