By: Prof. Antonio E. Casurao, Sr.
Under the free enterprise economy, we shall find four basic market structures that will determine the characteristics of a certain industry in terms of market share, pricing, products and competition. This particular discussion which will tackle about the four basic market structures, will start from the most free enterprise market to the most controlled one. Towards the end, it will focus on the oligopolistic market structure.
Basically, the four market structures are the pure competition, oligopolistic, monopsony and monopolistic. Pure competition is characterized by a market where there are many buyers and sellers. There is stiff competition in this market structure where sellers can offer products and services to the market that are competitive either in quality or price, or a combination, depending on the response of the buyers. Buyers on the other hand, can exert their power by dictating the price. If there are many available products or services, buyers can choose for those with best price offer and the best quality. Therefore a large “substitution effect” will happen, wherein the many alternative products will be purchased. Sellers and producers respond to it by improving the quality or lowering the price. The market forces under the law of supply and demand effectively work in this structure. The prices are usually elastic as its response to the demand. Businesses under this category are easier to enter, but they should be weathering the competition. Products are those that are needed basically by the majority, like that of fast moving manufactured goods.
The second market structure is the oligopolistic structure. This is characterized by a market wherein there are many players but there are only few who appear to have gained the major market share and their names became a byword in the market. This will be discussed in details below.
The third market structure is monopsony. This is characterized by an industry wherein the buyer can exert power and can effectively dictate the price, and that the suppliers and providers have almost no choice but to sell their products to this enterprise. In effect, a monopsonic structure tends to have one or very few buyers that dominate among many sellers and providers. This also happens when in a particular market or locality there is only one enterprise which sells, distributes, manufactures, or provides services using the supplies provided by many suppliers.
An example of this is the industry of the independent power producers whose buyer in a particular locality is only the enterprise which has the sole mandate to distribute like that of MERALCO in Metro Manila and nearby provinces, SAMELCO of Samar, BATELCO of Batangas, CENPELCO of Pangasinan, and many more.
And the fourth market structure is monopolistic. This is characterized by a market or industry which is denominated by only one enterprise in a particular locality or market providing the products or services. This is true for products that must have been highly controlled by the government such as power, water and other products that sources are scarce. Monopoly is the king in term of pricing.
In turn, I will focus my discussion on oligopoly. As mentioned, this is characterized by a market where there are many players but there are only few who appeared to have gained the major market share and their names become a byword in that market. It happens when among these players, 60% of the market is shared by only five or less number of companies, and the rest is shared among many small players. This is true with certain worldwide known brands of shoes and apparel, coffee shops, fast food chains, the case of SM Supermarket, Robinsons, Pure Gold, and many more. The reason for this is, during the process, few enterprises were able to establish a strong brand equity that created demand and popularity for its products, and the rest...