Market structure

Virtually all businesspeople claim the markets they operate in are highly competitive. Colorful terms like dog-eat-dog, cutthroat COMPETITION, and economic Darwinism are used to describe behavior in markets. Market structure refers to models representing the degree of competition that exists in a market. Economists use the following five criteria to define four market-structure models.
• number of firms in the market
• whether the firms are acting independently or not
• presence or lack of knowledge of market conditions (prices and variations in quality)
• ease with which new competitors can enter a market
• degree to which producer’s PRODUCTs are similar or different (product differentiation)
The four models of market structures are PERFECT COMPETITION, MONOPOLISTIC COMPETITION, OLIGOPOLY, and MONOPOLY. A perfectly competitive market has many independently operating firms, consumer and producer knowledge of market conditions, ease of entry, and standardized products. Markets for agricultural products are often used as examples of perfectly competitive markets. Because of knowledge of market conditions and ease of entry, perfectly competitive markets result in lower prices, greater output, and only normal levels of PROFIT. Logically business managers prefer not to be in this type of market, which is why many firms attempt to differentiate their products from competitors’ products. Monopolistic competition is a market structure very similar to perfect competition, differing only in product differentiation rather than standardization. With product differentiation, firms gain a small degree of pricing power. If consumers perceive a product as being different from competitors’ products in some positive manner, they will likely be willing to pay more for the product and less willing to switch to other products with a price increase. This allows the firm to earn above-normal profits, at least for a short period of time. Ease of entry and knowledge of market conditions prevent businesses in monopolistically competitive markets from earning longterm economic profits. Retail clothing and fast-food markets are often good examples of monopolistic competition. New variations on products and services and significant amounts of SALES PROMOTION are used in these markets in efforts to continually create product differentiation. Oligopoly is a market structure characterized by few firms, BARRIERS TO ENTRY, and either standardized or differentiated products. Economists have developed concentration ratios to measure the market share held by firms in oligopolistic markets. Markets with only a few firms quickly recognize that each firm’s actions affect the other firms in the market. This is called market interdependence, whereby each firm has to consider competitors’ actions and reactions to their decisions. In oligopolies firms are reluctant to raise prices for fear that their competitors will not also do so. However, they will match price decreases because they do not want to lose customers and market share. Therefore oligopolists find price competition is not to their advantage and instead engage in nonprice competition—competing based on service, reputation, and product variations. Automobile and steel manufacturing markets in the United States are examples of oligopolies. Monopolies are markets with only one firm because of considerable, if not overwhelming, barriers to entry. Control of a critical resource or technology can give a firm monopoly power. Because of considerable pricing power and the presence of strong barriers to entry by other firms, monopolists earn economic profits even in the long run. ANTITRUST LAWs and regulations are often used to control or reduce the power of monopolists. Local utility companies are often regulated monopolies, while firms with a PATENT for a unique product have temporary monopolies. Markets characterized by perfect competition and monopolistic competition generally result in lower prices and greater output than those characterized by oligopoly or monopoly.