One of the crucial elements to understanding how a market will function (though it will not explain everything) is its market structure. These are the key elements that determine the behavior of firms in the market and the outcome that will be produced by the market. One way of considering the market structure is to talk about the conditions that exist in the market. These conditions fall into (approximately) four categories: • Actors in the market (both numbers of actors and the sizes of these actors • The entry conditions (which includes the exit conditions) • Information characteristics of the market
• Product characteristics
Taken together, these factors provide a useful picture of a market, revealing how it is likely work and the results that one would observe in this market. We will examine a number of different theoretical market structures that help us understand the nature of actual markets.
Three of these are of significant interest to us, both from the standpoint of understanding the way that different types of markets operate, but also how this relates to interactions that arise within the legal system. These three types of market types or structures are:
1. Perfect Competition
This document only introduces each of these types and gives a basic description of their characteristics and the type of outcome one can expect in each of these types of markets. Separate materials are available to provided a more detailed discussion of each of these different structures.
The first of these is the perfectly competitive market.
The outcome of this market structure is a situation in which firms (as well as consumers) act as price takers. This condition results from the circumstances that exist in these markets, with respect to the categories described above. As they apply to the competitive market, these conditions are: 1. Many buyers and sellers
2. No restrictions on entry or exit
3. No advantages to existing firms (no special knowledge or equipment) 4. Full information on the part of buyers and sellers
5. Products are homogeneous
Taken all together, these factors imply that no single firm has any meaningful influence on the market. This is the essence of price-taking behavior: no firm can have any significant role in setting prices, so all firms must take the market price as given. What this, in turn, implies is that a firm can sell all of the output it wants at the going price.
Whenever economists discuss the workings of the market, typically there is a focus on the interaction of supply and demand. This basic model starts with and generally is based upon the type of situation present in a perfectly competitive market.
The diagram above illustrates the basic demand and supply diagram, and its workings are the basis for much of the analysis done with markets. The underlying presumption here is that you are considering a perfectly competitive market, where the interaction of buyers and sellers determines the market price and quantity. At the same time, firms in these markets take the information at hand about the market price to determine how much they will produce (which contributes—albeit minutely—to the supply in the market).
When the conditions necessary to have a perfectly competitive market do not hold, then other market structures become relevant. The first that we want to consider is the exact opposite of the circumstances found in the perfectly competitive market—the monopoly market.
The central feature here is that for a monopoly firm, their behavior is one of a price maker. This means that the firm has (in this case, full) market power, or control over the market price. This arises out of the peculiar circumstances in which the monopolist operates. The following are the basic market structure conditions:
1. Many Buyers and a single Seller