Components of Market Structure, Dynamics of Market Structure – Conduct and performance, Forms of Market Structure,Characteristics of Perfect Competition

1. MARKET STRUCTURE
Dr. Devyanee K. Nemade
Assistant Professor
Department of Agricultural
Economics & Statistics
Dr. PDKV, Akola

2. MARKET STRUCTURE
Meaning:
The term structure refers to
something that has organization and
dimension – shape, size and design; and
which is evolved for the purpose of
performing a function.

3. By the term market structure we refer to
the size and design of the market. It also includes
the manner of the operation of the market.
1. Market structure refers to those organizational
characteristics of a market which influence the nature
of competition and pricing, and affect the conduct of
business firms;
2. Market structure refers to those characteristics of the
market which affect the, traders behavior and their
performances;
3. Market structure is the formal organization of the
functional activity of a marketing institution.

4. * Components of Market Structure:
1. Concentration of Market Power
2. Degree of Product Differentiation
3. Conditions for Entry of Firms in the Market
4. Flow of Market Information
5. Degree of Integration

5. 1. Concentration of Market Power:
The concentration of market power is an important
element determining the nature of competition.
The number and size of firms existing in the market.
The extent of concentration represents the control of an
individual firm or a group of firms over the buying and
selling of the produce.
A high degree of market concentration restricts the
movement of goods between buyers and sellers at fair and
competitive prices, and creates an oligopoly or oligopsony
situation in the market.

6. 2. Degree of Product Differentiation:
If products are homogeneous, the
price variations in the market will not be wide.
When products are heterogeneous, firms have
the tendency to charge different prices for
their products. Everyone tries to prove that
his product is superior to the products of
others.

7. 3. Conditions for Entry of Firms in the Market:
Another dimension of the market
structure is the restriction, if any, on the entry
of firms in the market. Sometimes, a few big
firms do not allow new firms to enter the
market or make their entry difficult by their
dominance in the market. There may also be
some government restrictions on the entry of
firms.

8. 4. Flow of Market Information:
A well-organized market
intelligence information system helps
all the buyers and sellers to freely
interact with one another in arriving at
prices and striking deals.

9. 5. Degree of Integration:
The behavior of an integrated market
will be different from that of a market where
there is no or less integration either among
the firms or of their activities. Firms plan their
strategies in respect of the methods to be
employed in determining prices, increasing
sales, co-ordinating with competing firms
and adopting practices.

10. Dynamics of Market Structure – Conduct and
performance:
For a satisfactory market performance,
the market structure should keep pace with the
following changes:
1. Production Pattern:
Significant changes occur in the
production pattern because of technological,
economic and institutional factors. The market
structure should be re-oriented to keep pace
with such changes.

11. 2. Demand Pattern
The demand for various products,
specially in terms of form and quality, keeps on
changing because of change in incomes, the
pattern of distribution among consumers, and
changes in their tastes and habits. The market
structure should be re-oriented to keep it in
harmony with the changes in demand.
(eg. Engle’s law of consumption)

12. 3. Costs and Patterns of Marketing Functions:
Marketing functions such as transportation,
storage, financing and dissemination of market
information, have a great bearing on the type of
market structure.
Government policies with regard to
purchases, sales and subsidies affect the
performance of market functions. The market
structure should keep on adjusting to the changes in
costs and government policy.

13. 4. Technological Change in Industry:
Technological changes necessitate
changes in the market structure through
adjustments in the scale of business, the
number of firms, and in their financial
requirements.

14. Forms of Market Structure:
On the basis of competition, a market can be
classified in the following ways:
A. Perfect Competition
B. Imperfect Competition
1. Monopoly
2. Duopoly
3. Oligopoly
4. Monopolistic Competition

15. A. Perfect Competition Market:
Perfect competition is a market
structure in which there are many sellers
and buyers transacting a homogenous
product.
*

16. Characteristics of Perfect Competition:
1. Large number of buyers and sellers
2. Homogenous product
3. Free Entry or Exit of Firms:
The next condition is that the firms should be free to
enter or leave the industry. It implies that whenever the
industry is earning excess profits, attracted by these profits
some new firms enter the industry.
4. No Government Regulation:
Sellers are free to sell their goods to any buyers and the
buyers are free to buy from any sellers.
*

17. 5. Perfect Knowledge in Market condition:
This condition implies a close contact between
buyers and sellers. Buyers and sellers possess
complete knowledge about the prices at which goods
are being bought and sold, and of the prices at which
others are prepared to buy and sell.
6. Absence of Transport Costs:
Another condition is that there are no transport
costs in carrying of product from one place to another.
If transport costs are added to the price of the product,
even a homogeneous commodity will have different
prices depending upon transport costs from the place
of supply.

18. 7. Profit Maximisation Goal:
Every firm has only one goal of maximising its
profits.
8. Absence of Selling Costs:
Under perfect competition, the costs of advertising,
sales-promotion, etc. do not arise because all firms
produce a homogeneous product.

19. B. Imperfect Competition:
1. Monopoly:
Monopoly is a market situation in which there is
only one seller of a product.
No other firms produce a similar product.
There is a single firm selling a commodity for which
there are no close substitutes.
For eg.: Railway
2. Duopoly:
A duopoly market is one which has only two sellers
of a commodity.

20. 3. Oligopoly Market:
A market in which there are more than two but still
a few sellers of a commodity is termed as an oligopoly
market.
Pure oligopoly is found primarily among producers
of such industrial products as aluminium, cement,
copper, steel, zinc, etc.
Imperfect oligopoly is found among producers of
such consumer goods as automobiles, cigarettes, soaps
and detergents, TVs, rubber tyres, refrigerators,
typewriters, etc.

21. Characteristics of Oligopoly:
In addition to fewness of sellers, most oligopolistic
industries have several common characteristics which are
explained below:
1. Interdependence:
Each oligopolist firm knows that changes in its price,
advertising, product characteristics, etc. may lead to
counter-moves by rivals.
He can reduce or increase the price for the whole
oligopolist market by selling more quantity or less and affect
the profits of the other sellers.
It implies that each seller is aware of the price-moves of
the other sellers and their impact on his profit.

22. (2) Advertisement:
“Under oligopoly advertising can become a life-
and-death matter.”
For example, if all oligopolists continue to spend a
lot on advertising their products and one seller does not
match up with them he will find his customers gradually
going in for his rival‟s product.
If, on the other hand, one oligopolist advertises his
product, others have to follow him to keep up their sales.

23. (3) Competition:
This leads to another feature of the oligopolistic
market, the presence of competition.
Each seller is always on the alert and keeps a close
watch over the moves of its rivals in order to have a
counter-move. This is true competition.

24. 4. Lack of Uniformity:
Another feature of oligopoly market is the
lack of uniformity in the size of firms.
Some may be small, others very large. Such a
situation is asymmetrical. This is very common in the
American economy.

25. Monopolistic competition:
When a large number of sellers deal in
heterogeneous and differentiated form of a
commodity, the situation is called monopolistic
competition.
For example, they have to choose between various
makes of insecticides, pumpsets, fertilizers and
equipments.

26. The following are the main features of monopolistic
competition:
(1) Large Number of Sellers:
In monopolistic competition the number of sellers
is large.
2) Product Differentiation:
One of the most important features of the
monopolistic competition is differentiation.
For example, they have to choose between various
makes of insecticides, pumpsets, fertilizers and
equipment.

27. (3) Freedom of Entry and Exit of Firms:
Another feature of monopolistic competition is the
freedom of entry and exit of firms.
(4) Product Groups:
There is no any „industry‟ under monopolistic
competition but a „group‟ of firms producing similar
products. Each firm produces a distinct product and is
itself an industry.
For eg.: Product groups, such as cars, cigarettes, etc.

28. (5) Selling Costs:
Under monopolistic competition where the
product is differentiated.
Selling costs are essential to push up the sales.
Besides, advertisement, it includes expenses on
salesman, free service, free sampling, premium
coupons and gifts, etc.