Question

What are the characteristics of market structure? The most common ones and explain each one clearly.

Answer 1

Market structure refers to the types of market in which the producers or firms operate.

Characteristics of market structure.

1.Number of Firms.The power of the seller to influence the market depends upon its share in the total supply.Smaller is the number of sellers ,the larger would be the share of each firm in the total supply and therefore ,larger would be the power of the firm to influence the price.On the other hand if the number sellers is large ,the power to influence the market would be less because its share in the total supply is less.On the basis of number of sellers in the market we distinguish between Monopoly, where there is only one seller,Perfect competition and monopolistic competition ,where there are large number of sellers and Oligopoly where there are a few sellers.

2.Nature of the product.Different market forms are distinguished on the basis of nature of the product.The amount of competition depends on how similar are the goods that are produced by the firms.In perfect competition goods produced by different firms are homogeneous.So no single firm can influence the price.But in monopolistic competition goods produced are differentiated.As a result ,different producers of similar (but not identical)goods are in a position to charge different prices for goods.

3.Entry and Exit of firms.Freedom of entry and exit means there are no restrictions on the entry and exit of firms in the market.If the existing firms are earning abnormal profit ,new firms will enter in to the industry.This will increase the total output in the industry ,resulting in a fall in price and wiping out of the abnormal profit. Freedom of entry or exit ensures that producers end up earning minimum profits or normal profits.Example is Perfect Competition and Monopolistic Competition.However if there are restriction on entry of new firms ,existing firm may continue to earn abnormal profit as there is no rival firm .As a result existing firm may enjoy Monopoly power.

4. Knowledge of the market.If buyers and sellers have full information about market conditions ,like the price at which the product is being sold by other sellers and the nature of the product,then only a single price would prevail in the market.This is the characteristic feature of Perfect Competition.But in monopolistic Competition ,consumers may be ignorant about the quality of different brands .This may result in different prices being charged for same or similar product.

5.Degree of Price influence. Different forms of market may differ from each other in terms of their influence on price determination.A perfectly competitive firm cannot have any influence on market price .It is considered to be a price taker..A Monopolist on the other hand has a great power in influencing the price of the commodity.Monopolist is a price maker.The position of a firm under monopolistic competition is in between these two extremes.Under monopolistic Competition a firm has some power to influence the price of its product, but it has to take in to consideration the pricing policy of the rival firms while deciding its product price.It is a price maker but with in certain limits.So demand curve of a perfectly competitive firm is a horizontal straight line as it is the price taker,whereas the demand curve of a monopoly and monopolistic competition is a downward sloping one as it is a price maker.