Market Structures

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MARKET STRUCTURE

It is common to see similar products offered for sale at vastly different prices. For example, the price of a hotel room can vary from as low as £25 per night to several hundreds of pounds or more in the same city; the cost of gym membership will vary depending on the nature of the business organisation offering the service. An organisation’s ability to influence the price at which it sells its products is largely dependent upon the type of market in which it operates. The purpose of this session is to explore each of the main types of market structure and consider the differences between them.

There are 4 main types of market structure:
* Perfect competition
* Monopoly
* Oligopoly
* Monopolistic competition

There are two main differences between each of the above market types: 1. The amount of competition there exists between the organisations involved in the market. 2. The degree to which the organisation determines the price of the good or service it produces.

The way in which the amount of competition between one firm and its rivals changes depending on the type of market structure can be illustrated in the following way:

Perfect competition
Perfect competition
Monopolistic competition
Monopolistic competition
Oligopoly
Oligopoly
Monopoly
Monopoly

increasing competition
increasing competition

Figure 1: market structure and competition

As Figure 1 shows, the amount of competition taking place increases as you move from left to right, with monopoly representing the least degree of competition and perfect competition the most.

It is worth looking at each of the four main types of market individually to understand their main features and examine more closely the differences between them.

Perfect competition

Perfect competition is a ‘theoretical’ and extreme type of market structure, rarely found in the real business world. The market (i.e. the combined actions of all the firms operating in that particular market) determines the price at which the good or service being produced will be sold. Each firm operating in the market is referred to as a ‘price taker’ as it has no influence on the market price.

The key features of a perfectly competitive market are:
* A large number of firms and customers
* Free entry to and exit from the market
* Homogenous goods/services
* Full knowledge of the market price amongst both customers and sellers in the market

Perfect competition: individual firm as ‘price taker’

D
D
p
p
p
p
Individual firm price
Individual firm price
Market price
Market price
Quantity
Quantity
Price
Price
Quantity
Quantity
Price
Price
S
S
D
D

Figure 2a Figure 2b

Figure 2a illustrates the interaction of demand and supply within the market to determine the market price (just as shown in week 2’s session on demand and supply). The demand curve D represents total demand within the market i.e. the combined demand from all of the customers willing and able to purchase the good or service being sold. The supply curve S represents the total supply within the market i.e. the combined supply of all of the organisations willing and able to supply the good or service.

The equilibrium or market price which results from the interaction of D and S is labelled as p. As no individual firm is large enough to control the market, each one must accept the market price, regardless of the amount it sells. This gives the unique, though highly theoretical, horizontal demand curve D for individual firms within the market seen in Figure 2b. Any organisation wishing to sell above the market price p will lose sales to its competitors. Those trying to sell below p will likewise go bust because their small size would limit their ability to satisfy total market demand. Since the good or service produced within the market is homogenous i.e. each product is identical, customers...
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