Market Structures

1) Market is a place wherein commercial interactions happen, and these commercial interactions include both a
seller and a buyer. That makes a market — a market.

2) Market structure, in economics, depicts how firms are differentiated and categorized based on the types of
goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and
elements.

.3) A market structure could then be seen as the characteristics of a market that impact the behavior and results
of the organizations working in that market.

Ex: Smartphone Industry - which operates as an oligopoly - We all know that despite the small number of
businesses under the smartphone industry they dominate the market, because of the distinction and structure of
the products they offer and the nature of their business.

Types of Market Structures

a.) Perfect Competition

Perfect Competition is a type of market with various sellers and buyers, trading identical or exactly the same
products or homogenous products, which are indistinguishable among other competing products. Under this
type of market, business firms are small and do not have any influence in the prices of goods sold or services
offered in the market, hence each seller or buyer is a 'price taker'.

Price Taker - seller or buyer accepting or taking the prevailing market price for a product.

Characteristics:
• Built of numerous small firms that are price takers
• Offered products or services are homogenous
• There is perfect information
• Good for short term profit
• Sellers and buyers do not have unfair advantages
• Freedom of entry and exit in the market

Examples:
• Online shopping
• Agricultural industry

b.) Monopoly
In monopoly, there is only one firm who is the sole seller of a product or service without close substitutes. The
firm has complete control over the market and can set its own prices. Other firms cannot enter the market and
compete as there are barriers to entry.

Barriers to entry:
• A single firm owns an essential resource. Examples: Pandas in China and NGCP (National Grid Corporation of
the Philippines) - in charge of electricity transmission in the Philippines.
• The government gives a single firm the exclusive right to produce a good or offer a service. This is known as a
natural monopoly. Example: Meralco - sole provider of electricity in Metro Manila and other nearby provinces.
• The costs of production make a single producer more efficient than a large number of producers. Examples:
Electricity, Water, and Telecom.

Monopolies can happen through mergers, acquisitions, or by outperforming the competition, which can result in
being the only player in the market. However, there are criticisms regarding monopoly, like the control in price,
wherein companies can set it higher whenever they want to, which is unfair for the market.

RA 10667 (Philippine Competition Act) - prohibits entering into anti-competitive agreements abusing a dominant
market position, and entering into anti-competitive mergers and acquisitions.

Characteristics:
• Maximizes profit
• Price setter with complete control over the market
• Other sellers cannot enter the market due to the barriers to enter

c.) Oligopoly
● The word "oligopoly" comes from two Greek roots: "oligos," meaning "few," and "polein," meaning "to
sell." So, it essentially refers to a market situation where a few companies dominate the selling of a
particular product or service.
● It is a market structure with a small number of firms whose behavior is interdependent. When you think
of "big business," you are thinking of oligopoly.
● These companies have significant control over the prices in the market and they can influence each
other’s actions.
● When one company changes its prices or offers a new product, the other companies usually follow these
changes. This can lead to less competition and fewer choices for consumers compared to more
competitive markets.

Under oligopoly,
a. An undifferentiated oligopoly sells products that are identical or similar across producers. Ex. steel,
crude oil & tennis ball.
b. A differentiated oligopoly sells products that differ across producers. Ex. automobiles, breakfast cereals,
airlines & shipping industries.

Barriers to entry,
(1) Economies of Scale. If a firm's minimum efficient scale is large compared to industry output, only a few
firms are needed to produce the total amount demanded in the market. Ex. Automobile companies.
(2) High Cost of Entry. Oligopoly usually requires huge investments when starting a business because of the
equipment and facilities.
(3) Product Differentiation Costs. An oligopolist often spends millions or sometimes billions trying to
differentiate its products, since one of the main focus when it comes to competition is the branding or the
uniqueness of their products.
Characteristics of oligopoly:
(1) Maximizes Profits
(2) Price Setters
(3) Barriers to entry are high
(4) Firms are interdependent
(5) Can retain long-run abnormal profits
(6) Product may be homogeneous or differentiated

A common example of an oligopoly is the smartphone industry, where a few major companies, like Apple,
Samsung, and Google, dominate the market. These companies have significant market power, and their decisions
regarding pricing and features influence each other, creating a competitive yet interdependent environment.

d.) Monopolistic Competition

● It is a market structure in which many firms sell products that are similar but not identical.
● A firm takes the prices charged by its rivals as given and ignores the impact of its prices on the prices of
the other firms.
● Each company has some control over its prices because its products are differentiated or unique.
● Products differ from seller to seller—in terms of quality, packaging, and supplementary services offered.

Sellers may differentiate their products in four primary ways:

(1) Physical Differences - physical appearance and qualities. Ex. A shampoo-different scent, color, thickness,
and bottle design. It also covers the difference in terms of packaging.
(2) Location - there are a variety of locations where a product is available. Sellers may consider the
proximity, accessibility, and environment of their location.
(3) Services - products also differ in accompanying services. There are businesses that provide exceptional
services or personalized experiences to their customers, which may differ from one business to another.
Ex. Home Delivery & Free Installation
(4) Product Image - the image the producer tries to foster in the consumer’s mind. This includes the
branding, packaging, and advertising of their products. Their products’ logos, slogans, advertisements, etc.
must be eye-catching and must show that their products are functional and provide their perceived
benefits or value. Some businesses may also collaborate with celebrities to endorse their products.

Characteristics of monopolistic competition:

(1) Many buyers and sellers
(2) Freedom of entry and exit
(3) Perfect information
(4) Heterogenous products
(5) Degree of control over price
(6) Profit varies

Examples of monopolistic competition include:

1. Restaurants: Each offers unique menus and dining experiences, even though they all serve food.
2. Clothing Brands: Different brands sell similar types of clothing but differentiate through style, quality,
and branding.
 3. Toothpaste: Various brands offer similar products with unique flavors, packaging, and benefits.
4. Hair Salons: Each salon provides similar services but may differ in style, pricing, and atmosphere.

e.) Monopsony
Monopsony came from 2 Greek words; “monos” meaning single and “opsonia” meaning purchase. Monopsony is
the opposite of monopoly.

(Magkabaliktad lang yung dalawa, yung monopoly at monopsony. Sa monopoly isa lang yung seller at marami
yung buyer while sa monopsony naman isa lang yung buyer pero marami yung seller.)

• Monopsony is a market condition in which there is only one buyer, the monopsonist.

• Monopsonies commonly experience low prices from wholesalers because they can set demand and
control the price.

(Since isa lang yung buyer natin ng specific na good or service, pwedi siyang tumawad or iset yung price na gusto
niya, dahil pweding isipin ng mga seller na maraming options yung buyer kaya kinoconsider ng mga seller yung
gusto ng buyer, unlike sa monopoly na iisa lang yung seller, kaya siya yung may control at nagseset ng price kung
magkano niya gusting ibenta yung specific good or service na binebenta niya.)

Characteristics of monopsony:
a) One firm purchasing all of the goods and services in the market
b) No other buyers in the market
c) Barriers to entry into the market

A good example of this are wholesalers who purchase crops from different farmers.

(Sa example nato, yung buyer is the wholesaler while yung mga seller natin are the different famers. Magandang
example nito ay yung mga nagtatanim ng mga carrots, repolyo at kamatis. Alam naman natin na yung mga tanim
na ito is madaling masira at kaya kapag naani yung mga to kailangan agad madispose para hindi masira at malugi.
Kaya kung sino man yung bumibili ay nagkakaroon siya ng chance na hingin yung presyo na gusto niya, lalo na
kapag nagkataon na marami yung supply dahil nakapahaon yung mga ani, walang choice yung mga farmers kung
hindi ibigay yung presyo na gusto ng buyer kasi pag hindi nila ibinigay maaaring masayang lamang at pwede
nilang ikalugi.)

To put it simply:
• A monopsony is a market condition in which there is only one buyer. Because there is only one buyer for a
good or service, the buyer sets the demand, and therefore, controls the price. Monopsonies, like monopolies, are
inefficient to a free market, where supply and demand regulate prices to be fair for consumers.

Pricing
- price is the sum of all values that customers are willing to give up in exchange for the benefits of having the
product or service.
- pricing is the process of deciding how much a business will charge for its products or services.
- It’s a very important process because it affects:
 * company’s profits - if you set it too high, the company may lose potential customers and if you set it too low,
hindi maccover ung costs in developing the product, like ung sa testing and packaging ganon. malulugi tayo don.
* how the customers will view the product - pag mahal, customers may assume na high quality ung product,
while pag mura naman, the customers may think na low quality siya.

This is where pricing strategies enter. Companies use different strategies to attract customers, enter new markets,
or stay competitive.

Pricing Strategies
a.) Skimming
- when a company sets a high price for a new, released product then gradually lowers the price over time
- usually used by brands with established credibility
- Example: Apple. At the start, they charge a very high price because they know that the people who are
willing to pay a lot for new technology will buy it first. Once the company sells enough to the early
customers, they begin lowering the price so that more people can afford it and after a few months or
when a new model is about to come out.
- Key point: The company makes the most profit by charging high prices to those willing to pay more,
before capturing more customers by lowering the price over time. This way, the company gets the most
profit at each stage.

b.) Penetration Pricing

- when a company sets a very low price for a new product or service then increases the price later
- bakit nagsstart sila sa low price? kasi this attracts a big number of buyers who do not want to take the
risk of trying out a new product at its regular price. gusto nila makaattract ng maraming customers, to
quickly penetrate and enter the market kaya nga penetration ung tawag sakanya.
- 1st example: newly launched food delivery apps. To get people to download and use it, the company
offers very low delivery fees or even gives out discounts to get attention and easily encourage customers
to try the service. Once a lot of people are using the app and have become loyal to it, the company starts
raising the prices because they know customers are now comfortable with the service and might continue
using it even at a higher cost.
- 2nd example: Many streaming platforms, like Netflix or Disney+ or Spotify, offer a low subscription fee
for the first few months tapos pag nahook na tayo, pag nasanay na tayo sa platforms na to, doon nila
itataas ung presyo.
- key point: business focuses on attracting and gaining as many customers as possible by offering low
prices and increases them once they’ve gained loyalty and after creating demand.

- To wrap up, let’s compare the two strategies:

- - Skimming pricing: Start with a high price and then gradually lower it to capture different groups of
customers to maximize profit at each stage.
- - Penetration pricing: Start with a low price to gain customers quickly, then raise the price once they are
loyal.

- Both strategies are useful, but companies choose the one that best fits their goals and the market
conditions.
c.) Dual Pricing
Definition
- Setting different prices for the same product in different markets or sales channels.

Explanation
- Dual pricing occurs when a company sets two or more different prices for the same product or service,
typically based on factors like geography, distribution channels, or customer segments. The goal is to tailor prices
to the market conditions or specific consumer groups, often influenced by factors like income levels, purchasing
power, competition, or costs of doing business in different regions.

- This strategy helps businesses maximize profits by adapting to local market conditions while remaining
competitive. It also allows companies to reach more customers by offering a product at a price point they can
afford in various markets.

Examples
- A pharmaceutical company may charge higher prices for a drug in the United States, where consumers or
insurance companies can afford it, but sell the same drug at a much lower price in a developing country to make
it more accessible.

- A car manufacturer might charge different prices for the same car model in Europe and Asia due to
different levels of taxes, import duties, and market demand in each region.

d.) Psychological Pricing

Definition
- Pricing strategy designed to affect a buyer’s perception, making prices seem more attractive by using
subtle pricing cues.

Explanation
- Psychological pricing is based on the idea that certain pricing formats can influence consumer behavior.
The aim is to make prices seem more attractive or reasonable by leveraging how people perceive numbers and
costs. Common methods include ending prices in odd numbers, such as 9 or 99, which makes the price appear
significantly lower than it is. People often focus more on the leftmost digits, perceiving $9.99 as much cheaper
than $10, even though the difference is just one cent.

- Psychological pricing can also involve offering multiple pricing tiers to give customers a sense of choice
and value, or setting "prestige" prices to imply higher quality or luxury.

Examples
- Charm pricing (Charm pricing refers to the practice of setting prices slightly below a round number, such
as $9.99 instead of $10.)
- Decoy pricing (Decoy pricing involves offering a third pricing option that is less attractive to make
another option appear more appealing by comparison.)
- Luxury pricing (Luxury pricing, also known as prestige pricing, sets a high price for a product to convey
exclusivity, status, or superior quality.)