SUBJECT: ECONOMICS

Topic: Market Structures

 OBJECTIVES
Students should be able to:
• Define the term market structure
• Identify the different types of market structures
• Define perfect competition
• Explain the features of perfect competition
• Define monopoly
• Explain the features of a monopoly
• Define monopolistic competition
• Explain the features of a monopolistic competition
• Define oligopoly
• Explain the features of an oligopoly
 CONTENT SUMMARY
Market structure

• Is defined as the features that determine the behaviour and performance of firms in the
industry.

In the economy there are four main market structures;

• Perfect competition
• Monopoly
• Monopolistic competition
• Oligopoly
 PERFECT COMPETITION
• Is a market structure in which there are many sellers and many buyers, producing a homogeneous
product.
Characteristics
• There are many buyers and many sellers in this industry
• Products are homogeneous (each unit of the product is identical)
• There is perfect knowledge in the market (buyers & sellers are aware of the product, its features, its
price and the other buyers and sellers).
• There is one prevailing price in the market
• Whatever quantity of the product that firms produce in the market will be sold at the prevailing price.
• No firm can influence price, as a firm’s output is only a small part of the total output in the industry.
• The firm is a price-taker. (the individual firm has no market power)
• There is freedom of entry and exit.
NB: Perfect competition is a theoretical concept & in the real world there are no perfect markets. Gas
stations & the stock exchange are perhaps two of the best examples.
 MONOPOLY
Is a market structure in which there is only one seller and there are many buyers.
Characteristics
• There is only one firm.
• There is no competition (the firm is the industry).
• There are many buyers of the product.
• The product itself is unique and has no close substitutes.
• There is imperfect knowledge in this market. (buyers and sellers are not aware of all
the information in the market)
• The monopolist can only sell more at a lower price and if price increases, less will be
sold.
• The firm is a price-maker
• There are barriers to entry that prevents firms from entering the industry. (no free
entry into the industry)
 BARRIER TO ENTRY
Is anything that prevents new firms from entering and competing in an industry.

Some barriers to entry are;

• Government regulations; these are laws that prevent new firms from entering an industry.
(In Caribbean economies there is only one firm providing water, due to government
regulations.
• Patents; grants to the inventor exclusive rights to the patented product or process.
• Large capital outlay; that prevents smaller firms from entering an industry, e.g. oil refining.
• Ownership by the firm of a scarce factor of production. E.g. Angostura Trinidad Ltd is
the only firm that possess the knowledge of the secret ingredient in the Angostura bitters recipe
– this is the factor capital or ‘know-how.
 MONOPOLISTIC COMPETITION
• Is a market structure in which there is competition amongst many firms. This market
structure has features of both perfect competition and a monopoly. Even the name of this
market structure is a combination of monopoly and perfect competition.
Characteristics
• There are many buyers and many sellers just as in perfect competition.
• The product is similar yet differentiated through branding. (the product is made to look the
same in the eyes of the consumer but there is product differentiation)
• There is imperfect knowledge in the market (buyers & sellers do not have all the information
on the product, its features, its price and the other buyers).
• The firm is a price-maker (as with the monopolist more can only be sold at a lower price and
less is sold if the price increases).
• There might be some barriers to entry, though they are not difficult to break through.
E.g. restaurants, hair and beauty salons & supermarkets.
 OLIGOPOLY
Is a market structure in which there are a few firms competing in the
market.
Characteristics
• There are few sellers and many buyers
• The product might be homogeneous (unleaded petrol) or differentiated
(detergents).
• There is imperfect knowledge in the market, as firms & buyers might not
know of all sellers, buyers, prices and products available.
• Firms tend to avoid price competition and so prices remain rigid or there
is price-stickiness.
 OLIGOPOLY
• Price rigidity: means that prices remain at a certain level over a long
period.
• If firms increases prices, competitors will not follow and so the given
firm will lose customers to its rivals (market share and revenue will also
decline). If the firm lowers prices, its competitors will follow and so the
firm will not gain additional customers, market share or revenue. In fact,
the revenue will fall. Cutting of prices will lead to prices wars –
benefitting no firm, only the customers.
• A price war; occurs when rival firms continuously reduce prices to
undercut each other.
• NB: Oligopolies might choose to enter into agreements with, or collude
with other firms to maximize profits.
• Collusion; occurs when there are price and quantity agreements with
other firms.
 CARTEL
• A group of sellers colluding in this way is called a cartel. In many
countries cartels are illegal.
Characteristic
• There are high barriers to entry in this market, usually due to high set-
up costs. E.g. an individual cannot simply take a loan from a bank and
set up a bank or an oil refining company, as he does not have the
knowledge or the large capital outlay.
• NB: the oligopoly is also a typical market structure in the real world,
unlike perfect competition and monopoly.
 THE FEATURES OF EACH MARKET STRUCTURE
Monopoly Oligopoly Monopolistic Perfect
competition competition
Number of One Few Many Many
sellers
Number of Many Many Many Many
buyers
Product Unique Homogeneous/ Differentiated Homogeneous
differentiated
Knowledge of Imperfect Imperfect Imperfect Perfect
market
Price Price-maker Price-maker Price-maker Price-taker
with rigidity
Entry No free entry High barriers to Low barriers to Freedom of
conditions entry entry entry
 QUESTIONS FOR STUDENTS

1. Define a market structure

2. Give the four types of market structure
3. Differentiate between any two market structures