Main Market Structures- Meaning and Classification
Meaning of Market-
A market exists where transaction for goods and services takes place between buyers and sellers at an agreed price. According to French economist Cournot, “Economists understand by the term market not any particular market place in which things are bought and sold but the whole of any region in which buyers and sellers are in such free intercourse with one another that the price of the same good tends to equality is easily and quickly.”
Forms of Market-
- B-C (Business to Consumer)-For final goods and services.
- B-B (Business to Business)- For intermediate goods and services between owners of the firm. For example, raw materials, innovative ideas, etc.
- C-C (Consumer to Consumer)- For buying and selling of goods and services in the secondary market. For example, exchange of shares, or buying and selling of goods on digital commerce sites like OLX.
Criteria for Market existence-
- Existence Criteria- It depends on the number of firms such as there are many firms in perfect competition and a few firms in the Oligopoly form of market.
- Independence Criteria- It shows whether the buyers or sellers are dependent or independent of each other. It is competitive.
- Nature of Product– It decides whether a product produced by a firm is homogenous or differentiated.
- Condition of Entry and Exit– As the market is related to public goods and private goods. So there can be entry and exit conditions. In a few forms of market, there is no barrier on entry and exit for a firm whereas in other forms of market there is a restriction on entry or exit.
Clasification of Market-
A market can be classified into two sub-types:
- Perfect Competition
- Imperfect Competition
Perfect competition is said to prevail where there is a large number of buyers and sellers, selling homogenous products at the same price.
Characteristics of Perfect Competition-
- A large number of firms- The first condition of perfect competition is that there are a large number of firms. The position of a single form in the industry is just like a drop in the ocean. The number of buyers and sellers are so large in the market that no firm can influence the price of the product because the output of an individual substitutes a very small fraction of the total output of the whole industry.
- Homogenous product- The products produced by all firms in the industry is uniform or fully homogenous. They are perfect substitutes of each other. Cross elasticity between the products of the firm is infinite.
- Perfect information about the prevailing price- Buyers as well as sellers has complete knowledge about the product. No seller can charge a higher price for the product otherwise he will lose his customers. Similarly, buyers can not negotiate from the prevailing price.
- Free entry and exit of the firm- Under perfect competition, any firm can enter or exit in the market at any time. There must be no barriers.
- Firm acts as a price taker, not as a price maker- A firm under perfect competition is price taker and output adjuster.
2. Imperfect Competition-
Monopoly literally means one seller. ‘Mono’ means one and ‘poly’ means the seller. Thus monopoly means one seller or one producer.
Characteristics of Monopoly-
- Single seller of a commodity- Monopoly exists when one firm is the sole producer or seller of a product which has no close substitutes.
- Absence of close substitute of the product- If there are some firms that are producing close substitute for the product then the firm cannot be said to have monopoly. Thus a monopoly implies absence of all competition.
- Strong Barriers to entry into the Industry- Difficulty of entry of a new firm because one firm has sole control over the production of a commodity. The barriers which prevent the firms to enter the industry may be economic in nature.
- Firm is a price maker- In monopoly form of market one firm dominates the industry which results in price discrimination.
(b) Monopolistic Competition-
Monopolistic competition is a market structure in which there are many firms who sell closely related but differentiated products.
Conditions for Monopolistic Competition-
- Large number of buyers and sellers but less than perfect competition- Under monopolistic competition, there are relatively large number of firms. A small share of the market demand for the product
- Product differentiation takes place in monopolistic form of market- The produce can sell differentiated products which are close substitutes of each other. Working under monopolistic competition are not the same but are similar.
- Freedom of entry and exit- Free entry means that when in the industry, existing firms are making supernormal profit the new firms enter the industry which leads to the expansion of output as a result price of product fall in the long run. Under monopolistic competition, entry may not be as easy as free as under perfect competition.
- Lack of perfect knowledge- There is no perfect knowledge, unlike the perfect competition.
- Expenditure on advertisement and other selling costs- Under monopolistic competition, a firm bears advertisements and other selling costs to promote the sales of their products. The expenditure incurred on advertisement is prominent among the various types of selling costs.
An oligopoly is a form of imperfect competition. Oligopoly is said to prevail when there are few firms or sellers in the market producing or selling a product. It is often referred as competition among the few. The simplest form of oligopoly is duopoly which prevails when there are only two producers or sellers of a product.
Characteristics of Oligopoly form of Market-
- Entry and Exit of a firm- To enter into this market two types of barriers are required technique and legal. A technological barrier to entry arises when the potential firms do not have the required knowledge or access to inputs as existing firms. Legal barrier arises when government imposes restrictions on the entry of new firms to avoid any harmful condition among the firms.
- Product differentiation- Product differentiation along with economies of scale are significant cause of the existence of oligopoly in the industry.
- Number of competition is few- Any change in price and output, product affected by a firm will have a direct effect on the fortune of its rivals which will then retaliate in changing their own prices output of products.
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