Market Structure

Grouped on the basis of certain market characteristics

• Describes the competition and price formation in a market through the interplay between demand and the businesses' cost components.

The most used characteristics are:

• ⭐️ Market concentration: The number of competing businesses

• ⭐️ The buyers’ preferences

• ⭐️ Access barriers to the market: Advantages in terms of costs that the established businesses have in relation to potential buyers, e.g. patents.

A market can be

• ⭐️ Homogenous

• Where goods, that are considered being identical no matter the producer, are sold.

• ⭐️ Heterogeneous

• Where goods, which have different visible characteristics that make the buyers differentiate them from each other, are sold.

• The difference can, for example, be the packaging, the advertisement or the service that comes with the good.

The classical market structures are

• ⭐️ Monopoly

• Market share: 100%

• ⭐️ Perfect competition

In the case of monopoly

• It is possible to obtain a higher price because: ⚖ Competition < the competition of the competition market.

• The monopolist: Price ↑ → The buyer cannot turn to another supplier.

Characteristics of the monopoly:

• You can obtain the highest possible price conditional on the demand

• → “price fixer”

In the case of perfect competition:

• Price = market price

• The lowest possible price that only just covers the costs of the good

• → “Price taker”

In the case of a homogeneous market:

↪ ⚖ Number of businesses ↑ → price ↓ (when the market is in equilibrium, ie. when demand and supply are in equilibrium)

↪ The fewer businesses the bigger super-normal profits

The the case of partial monopoly

• The big business = “price fixer”

• The small businesses = “price takers”

⭐️ An oligopoly is a market with few suppliers. Each have their own influence on their own and the competitors’ sales.

• “Price leader” → the competitors adapt to this price.

Similarities between perfect competition and monopolistic competition:

• Low access and resignation barriers

• Many competitors

• High degree of substitution

• Monopolistic competition: More possibilities to differentiate

The supply side of the market structure:

• ⭐️ Monopsony: 1 buyer + multiple suppliers

• ⭐️ Duopsony/oligopsony: 2 or more buyers + multiple suppliers

• ⭐️ Bilateral monopoly: 1 supplier + 1 buyer

• → price formation through negotiations.

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