Haracteristics of a market structure

So far, we have talked only about firms in general without worrying about the sort of market in which they operate. But in this chapter we will see that the type of market in which the firm operates makes a great deal of differ­ence for the way in which it can and does behave. Under some market forms, for ex­ample, the firm has no control over price. In others, the firm has the power to adjust price in a way that adds to its profits and which, in the opinion of some, constitutes exploitation of consumers. Economists distinguish among different kinds of markets according to certain key characteristics. The characteristics are: (1) the number of firms in the market, (2) type of the product sold in the market i.e., whether the products of the dif­ferent firms are identical or somewhat different, (3) control over the price of the relevant product, (4) how easy it is for new firms to enter the market, i.e. barriers to new firms entering the market, (5) existence on non-price competition in the market. Each of these characteristics is briefly discussed below.

NUMBER OF FIRMS IN THE MARKET.

The number of firms in the market supplying the particular product under consideration forms an important basis for classifying market structures. The number of firms in an industry, according to economists, determines the extent of competition in the industry. Both in perfect competition and monopolistic competition, there are large numbers of firms or suppliers. Each of these firms supplies only a small portion of the total output for the industry. In oligopoly, there are only a few (presumably more than two) suppliers of the product. When there are only two sellers of the product, the market structure is often called duopoly. Monopoly is the extreme case where there is only one seller of the product in the market

TYPE OF THE PRODUCT SOLD IN THE MARKET.

The extent to which products of different firms in the industry can be differentiated is also a characteristic that is used in classifying market structures. Under perfect competition, all firms in the industry sell identical products. In other words, no firm can differentiate its product from those of other firms in the industry. There is some product differentiation under monopolistic competition—the firms in the industry are assumed to produce somewhat different products. Under an oligopolistic market structure, firms may produce differentiated or identical products. Finally, in the case of a monopoly, product differentiation is not truly an issue, as there is only one firm—there are no other firms from whom it should differentiate its product.

CONTROL OVER PRODUCT PRICE.

The extent to which an individual firm exercises control over the price of the product it sells is another important characteristic of a market structure. Under perfect competition, an individual firm has no control over the price of the product it sells. A firm under monopolistic competition or oligopoly has some control over the price of the product it sells. Finally, a monopoly firm is deemed to have considerable control over the price of its product.

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BARRIERS TO NEW FIRMS ENTERING THE MARKET.

The difficulty or ease with which new firms can enter the market for a product is also a characteristic of market structures. New firms can enter market structures classified as perfect competition or monopolistic competition relatively easily. In these cases, barriers to entry are considered low, as only a small investment may be required to enter the market. In oligopoly, barriers to entry is considered very high—huge amounts of investment, determined by the very nature of the product and the production process, are needed to enter these markets. Once again, monopoly constitutes the extreme case where the entry of new firms is blocked, usually by law. If for whatever reasons, new firms are allowed to enter a monopolistic market structure, it can no longer be termed a monopoly.

EXISTENCE OF NON-PRICE COMPETITION.

Market structures also differ to the extent that firms in industry compete with each other on the basis of non-price factors, such as, differences in product characteristics and advertising. There is no non-price competition under perfect competition. Firms under monopolistic competition make considerable use of instruments of non-price competition. Oligopolistic firms also make heavy use of non-price competition, Finally, while a monopolist also utilizes instruments of non-price competition, such as advertising, these are not designed to compete with other firms, as there are no other firms in the monopolist's industry.

We now turn to discussing each of the four market forms mentioned at the beginning, in light of the preceding characteristics used to classify market structures. The discussion that follows also provides additional details about the four market structures

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