Market Structure is a term which is used in Economics. Economists have defined market structure as the characteristics of the market including organizational and other marketing characteristics. We all know that a market includes buyers and sellers who are generally known as agents. These agents determine the price of a product depending on their real and potential interactions. So, market structure is about the characteristics which can influence the behavior and results of the companies working in the market. In general, market structure is defined as the market’s interconnected characteristics including the relative negotiation strengths and the number of the agents, degree of differentiation and product uniqueness and concentration, collision degree, competition level and forms, ease of entry and exit, extent of product differentiation etc. There are several forms of marketing structure which can result due to the interaction and differences between these aspects. The number of firms which are producing the same identical precuts which are homogeneous. Economists have placed high emphasis on competition nature and the mode of pricing in a particular market. Market structure highly influences the individual business’ behavior. Market structure influences the prices of the products set by the firms.
Features of Market Structure:
- The number of firms operating in the market including both local and foreign markets.
- Costs in the market including both nature and amount. It represents how the costs are affected in the market contestability including the scale economies and sunk costs presence.
- Product level differentiation.
- Customer’s turnover or market churns.
- Vertical integration degree.
- Company’s concentration ratio which shows the market share held by large companies.
The market structure can be grouped into two types: perfectly competitive structure and imperfectly competitive market structure (imperfectly competitive market structure includes oligopoly, duopoly, and monopoly and monopolist competition). Basic types of market structure and described below:
- Perfect Competition: This type exists when several small firms compete with each other. In such condition in a competitive industry, the firms produce socially optimal level at lowest, minim cost per unit. There are many firms in this type. There is freedom of entry. Homogeneous products are made. Profit remains normal. The products are produced with most cost efficient methods with least amount factor. This market is unrealistic.
- Imperfect Competition: It differs from perfect competition. The price determination can be influenced by the agents. It further leads to efficiency losses. Imperfect competition market structure can be classified into following market structures:
Monopoly: Monopoly market is composed of a sole seller who has complete power in price determination. One firm has the complete domination over the market. There are barriers to entry for other firms. The profit remains supernormal. There is only one product provider. The firm reduces output to drive up the prices and increase the profits as it doesn’t have any other competitors in the industry. It produces higher costs than the competitive firms, less than the socially optimal output level.
Oligopoly: Here, a series of firms offer the products. The number of sellers is not large so that the perfect competition prices are guaranteed. Oligopoly is dominated by a few firms. For example, a 5 firm concentration ratio of >50%. If the few firms collide, the output is reduced to drive up the prices and increase profits. These firms compete against each other.
Monopolistic Competition: There is high number of agents in this type of market. They produce a similar good. Due to product differentiation, it can be seen as unique. Thus, the prices are allowed to be higher than the marginal costs. Due to differentiation, each firm is considered as monopoly, whereas the whole market is a competitive market. There, the differentiation degree is not enough to undermine the possibility of substitution effects. For example, restaurants are included in this category. They all serve the different varieties of food, location being different. The product costs also vary from one firm to other while the product is the same, but is differentiation brings uniqueness in the product. The product costs above the achieved ones.
Contestable Markets: This market type allows an industry to enter and to exit with low sunk costs. There, the number of firms is not important. Instead, the extent of competition is the main threat. This market offers access to the same technology level. In real, perfect contestable market doesn’t exist.
Market structure is the mix of characteristics which determine the competition nature and prices. There several market structure where a firm can operate its business. These structures depend on the presence or absence of competition in the market. A market is known as concentrated if there is no competition. Market structures can be compared on the basis of price control degree, demand curve nature, over all comparison and influence on the activities of other firms. Market structure is central to economics and well as to marketing, concerning with strategic planning and decision making. In marketing, marketing structure is all competitive strategic planning as part of overall marketing plan. In economics, market structure mainly focuses on the overall market structure with the goals of consumer behavior definition and prediction.
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