Economics, Market Structure

Market Structure
The Market Structure refers to the characteristics of the market either organizational or
competitive, that describes the nature of competition and the pricing policy followed in the
market.
Thus, the market structure can be defined as, the number of firms producing the identical goods
and services in the market and whose structure is determined on the basis of the competition
prevailing in that market.
Kinds of Market Structure
The Perfect Competition is a market structure where a large number of buyers and sellers are
present, and all are engaged in the buying and selling of the homogeneous products at a single
price prevailing in the market.
In other words, perfect competition also referred to as a pure competition, exists when there is no
direct competition between the rivals and all sell identically the same products at a single price.
Under, the Monopolistic Competition, there are a large number of firms that produce
differentiated products which are close substitutes for each other. In other words, large sellers
selling the products that are similar, but not identical and compete with each other on other
factors besides price.
The Oligopoly Market characterized by few sellers, selling the homogeneous or differentiated
products. In other words, the Oligopoly market structure lies between the pure monopoly and
monopolistic competition, where few sellers dominate the market and have control over the price
of the product.
The Monopoly is a market structure characterized by a single seller, selling the unique product
with the restriction for a new firm to enter the market. Simply, monopoly is a form of market
where there is a single seller selling a particular commodity for which there are no close
substitutes.
The major determinants of the market structure are:
The number of sellers operating in the market.
The number of buyers in the market.
The nature of goods and services offered by the firms.
The concentration ratio of the company, which shows the largest market shares held by the
companies.
The entry and exit barriers in a particular market.
The economies of scale, i.e. how cost efficient a firm is in producing the goods and services at a
low cost. Also the sunk cost, the cost that has already been spent on the business operations.
The degree of vertical integration, i.e. the combining of different stages of production and
distribution, managed by a single firm.
The level of product and service differentiation, i.e. how the company’s offerings differ from the
other company’s offerings.
The customer turnover, i.e. the number of customers willing to change their choice with respect
to the goods and services at the time of adverse market conditions.
Thus, the structure of the market affects how firm price and supply their goods and services, how
they handle the exit and entry barriers, and how efficiently a firm carry out its business
operations.
Characteristics
1. Large number of buyers and sellers: In perfect competition, the buyers and sellers are
large enough, that no individual can influence the price and the output of the industry. An
individual customer cannot influence the price of the product, as he is too small in
relation to the whole market. Similarly, a single seller cannot influence the levels of
output, who is too small in relation to the gamut of sellers operating in the market.
2. Homogeneous Product: Each competing firm offers the homogeneous product, such that
no individual has a preference for a particular seller over the others. Salt, wheat, coal, etc.
are some of the homogeneous products for which customers are indifferent and buy these
from the one who charges a less price. Thus, an increase in the price would let the
customer go to some other supplier.
3. Free Entry and Exit: Under the perfect competition, the firms are free to enter or exit
the industry. This implies, If a firm suffers from a huge loss due to the intense
competition in the industry, then it is free to leave that industry and begin its business
operations in any of the industry, it wants. Thus, there is no restriction on the mobility of
sellers.
4. Perfect knowledge of prices and technology: This implies, that both the buyers and
sellers have complete knowledge of the market conditions such as the prices of products
and the latest technology being used to produce it. Hence, they can buy or sell the
products anywhere and anytime they want.
5. No transportation cost: There is an absence of transportation cost, i.e. incurred in

carrying the goods from one market to another. This is an essential condition of the
perfect competition since the homogeneous product should have the same price across the
market and if the transportation cost is added to it, then the prices may differ.
6. Absence of Government and Artificial Restrictions: Under the perfect competition,

both the buyers and sellers are free to buy and sell the goods and services. This means
any customer can buy from any seller, and any seller can sell to any buyer.Thus, no
restriction is imposed on either party. Also, the prices are liable to change freely as per
the demand-supply conditions. In such a situation, no big producer and the government
can intervene and control the demand, supply or price of the goods and services.
Thus, under the perfect competition, a seller is the price taker and cannot influence the market
price.
Source:
Megha , M. (2016, June 13). What is Market Structure? definition and meaning - Business
Jargons. Retrieved September 30, 2019, from https://businessjargons.com/market-
structure.html
Examples
Agricultural Markets
Agricultural markets are the closest representation of perfectly competitive markets. These are
marketplaces which have a large number of vendors selling fruit, vegetables, and poultry -
namely, identical produce. The prices of goods are competitive, and no single seller can yield an
influence over the pricing. Consumers are free to pick any seller, depending upon their choice.
Free Software
Free software also functions along similar lines as agricultural marketplaces. In this case,
software developers are free to enter and exit the market according to their will. Pricing is also
determined by market conditions, rather than the sellers.
Street Food Vendors
Street food vendors are also considered to be a part of a perfectly competitive market. Their
products are homogeneous in nature, and they are priced accordingly. Consumers are free to
make purchases at any vendor they prefer, and entry/exit barriers for sellers are virtually non-
existent.
Charlie, S. (2018, March 26). Simple Examples That Help Us Understand Perfect Competition.
Retrieved September 30, 2019, from https://businesszeal.com/perfect-competition-
examples

Economics, Market Structure

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Economics, Market Structure

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Market Structure

Kinds of Market Structure

The number of sellers operating in the market.

The number of buyers in the market.

The nature of goods and services offered by the firms.

The entry and exit barriers in a particular market.

5. No transportation cost: There is an absence of transportation cost, i.e. incurred in

6. Absence of Government and Artificial Restrictions: Under the perfect competition,

Street Food Vendors

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