Let's learn how different market structures differentiate industries based on competition for goods and services. We'll also learn how various factors govern this differentiation. Practical examples of these market structures will be provided to help readers understand how they work. The article emphasises the importance of understanding market structures for better business decision-making and highlights the advantages and disadvantages of each type of market.
Entrepreneurs and startups are booming like never before in the Indian market. Amid all this, knowledge of the structure of a market, its differentiation, and categorisation plays a key role in better operations. For you to understand how different businesses react to the competitive industry environment, what are the different markets and how they influence the economy, you must know what they are. You will cover all these topics related to market structures in this article for better business decision-making. Let us begin with the basics of market structure.
Do you know?The perfect competition market is the most efficient market structure for consumers and society. While the Monopoly market is the hardest to enter but holds the most power.
What Is the Market Structure?
Classification and differentiation of different industries based on the degree and nature of competition for goods and services is termed market structure. The market structure depicts the types of goods they sell, the type of operations and the external factors that affect the business. Factors like how easy it is to enter that type of market, the amount of competition in the market and the percentage of market share all determine the type of market structure. It is the number of firms and types of firms moving into the industry.
Factors Commonly Used to Classify the Industries
Classification and differentiation of different industries based on the degree and nature of competition for goods and services is termed market structure. The market structure depicts the types of goods they sell, the type of operations and the external factors that affect the business. Factors like how easy it is to enter that type of market, the amount of competition in the market and the percentage of market share all determine the type of market structure. It is the number of firms and types of firms moving into the industry.
The factors commonly used to classify the industries are:
1. The industry's Buyer Structure
Refers to the number and size of buyers. A market with many buyers will have a large market structure and vice versa.
2. The Turnover of Customers
How often do customers switch brands? It defines the level of competition the market structure may have.
3. The Extent of Product Differentiation
The type of products available, whether a market has the same type of products or unique ones, determines the amount of product differentiation in a market structure.
4. The Nature of Input Costs
The amount of investment required also determines how easy it is to enter or leave the market.
5. The Number of Players in the Market
It determines the amount of competition in a particular market structure. More players will result in a higher competition.
6. Vertical Integration Extent in the Same Industry
The level of integration of the firms in the ownership or control of the supply chain production shall determine the barriers a new form may find.
7. The Largest Player’s Market Share
The percentage of shares a firm possesses also determines the ease of market entry. These are common attributes used for differentiation. Based on these features, economists categorise industries/ companies with similar features in one group and others accordingly. Putting up with these features and categorisation, economists have come up with four distinct market structures.
What Are the Types of Market Structures?
Four types of market structure have been categorised based on the above-attributed factors. Based on the features of the market structure, they have been grouped as follows:
1. Perfect Competition
Perfect competition is primarily a theoretical situation in real-world economics. This type of market involves many companies manufacturing similar products and charging the same prices for them. There are no or low barriers to entry. Investments required to enter this type of market are low. Product prices are set as per consumer demand, with rare fluctuations in product prices. In cases where a company raises the price, there are high chances of losing the customer. This is because consumers can buy cheaper products from competitors.
In the real world, some forms of entry barriers exist in all industries. Similar product types can have variations that allow companies to price them differently, making this market type exist in books only and not in reality.
2. Oligopoly Market
A few large companies dominate this type of market. Products sold can be identical or different. Companies may collaborate on market prices. Strategies and actions taken by one company can influence its competitors.If a company raises its price, its competitors may keep their prices lower to gain more customers. If one company lowers its price to gain customers, the other may also need to do so to retain its customers.To avoid this negative effect on each other, these big companies often agree on how to price a product. Companies may restrict production to maintain high prices.
In such cases, government intervention becomes necessary to preserve consumer rights. For new companies to enter this type of market, it requires enormous capital investment and getting patented products may be difficult.
3. Monopoly Market
A single company dominates the market with its unique products. Due to the huge initial setup cost required, new companies may find it difficult or impossible to enter this type of market. The monopoly company may occasionally own all the required resources, patents, copyright, and licenses to operate in the market. A monopoly company does not have to contend with any substitutes in the market for its products. Monopoly has no competition in the market. As a result, even consumers do not have many options but to buy what the company offers at whatever prices are available.
This type of market is unfavourable for the consumer and society. Government intervention and check in such a type of market are the only saviour for consumers.
4. Monopolistic Competition
This type of market is a combination of monopolistic and competitive markets. Low entry barriers exist for new companies who wish to enter the market. Companies often sell similar products with a variety of features. Sellers compete among themselves. Products are differentiated in terms of quality or branding. A monopolistic company maximises its profits and enjoys all the benefits of a monopoly. The company initially produces many products as demand is high. Therefore, its marginal revenue (MR) corresponds to its marginal cost (MC).However, MR diminishes over time as new companies enter the market with differentiated products affecting demand, leading to less profit. Companies increase prices according to the features they offer. If one company raises its prices, other companies may not do the same for their products, and consumers may switch to cheaper substitutes.
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Examples of Market Structure
Let us understand these market structures using some practical examples.
1. Perfect Competition Market Example
Let's say a company plans to start paper manufacturing. The company invests in buying raw materials and machinery. The paper production technique is the same, and the quality of the paper formed is identical to its competitors. The company will have to sell its product at the same price as its competitors.In such a case, the company sells paper products to an existing consumer base at the current market rate and makes a reasonable profit. When the company raises prices for the same products, it loses customers to other companies whose prices remain unchanged. The company then sells below market prices. It gains more customers but cannot recoup production expenses or make a profit. Keeping the product price within the current market range is the most appropriate option for the company.
2. Monopolistic Competition Market Example
A company pays the initial startup cost to join the handcrafted shoemaking industry. The market already has many leading sellers with a wide variety of handcrafted shoes in different materials. The company differentiates itself from competitors by focusing on stylish, colourful shoes made from recycled, environmentally-friendly materials.It prices these shoes based on current market rates and sells them to fashionable, socially conscious consumers. Handcrafted shoe sales increase through effective advertising and a growing awareness of environmental issues among consumers. The company raises its prices with increased demand and grows its profit margin.
3. Oligopoly Market Example
Four book publishers dominate the publishing industry. They specialise in publishing romance, children's, educational, and business books by well-known authors. As they publish books in similar genres, they charge consistent prices.New publishing companies find it challenging to break into the market and compete with them because of startup expenses, promotional budgets, and copyright issues.
4. Monopoly Market Example
A company that manufactures computer operating systems and is the only in this line of business in the country. It offers excellent products and excellent customer service and dominates the domestic market. Other computer technology companies find it challenging to enter the market. They cannot afford the high startup expenses and do not have an advertising budget to rival the existing company.As it has complete market control, the company sells its computer operating systems at high rates. The government regulates the prices because the prices are too high for average consumers who require computer operating systems and have no other options. This is to make them more affordable for the public.
ALSO READ:Features and Examples of a Monopoly Market
Conclusion
Overall, the market structure of different types offers various opportunities for different businesses. The amount of investment determines what type of market structure you can opt for, determining the profit potential one can expect. Along with this, the ease of doing business varies across the different types. Understanding market structure is critical for policymakers and firms. Businesses must understand the market structure in which they operate to develop effective strategies to compete in the market.
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