Chapter 5

CHAPTER 5
MARKET STRUCTURES
After looking at the basic principles of demand and supply, it will also be helpful to describe
the nature of the product being sold, the number of buyers, and the competitive environment
in which buyers and sellers operate.
Competition is a rivalry among various sellers in the market. As students, we are familiar
with the word competition. We are exposed to competition in school: spelling the world
compete for the Miss Universe or Miss World title. We saw how the various teams of the
PBA compete to win the championship.
The market is a situation of diffused, impersonal competition among sellers who compete to
sell their goods and among buyers who use their purchasing power to acquire the available
goods.
There are varying degrees of competition in the market depending on the following
factors:
● Number and size of buyers and sellers
● Similarity or type of product bought and sold
● Degree of mobility of resources
● Entry and exit of firms and input owners
● Degree of knowledge of economic agents regarding prices, costs, demand, and
supply conditions
PERFECT COMPETITION
As the term suggests, perfect competition implies an ideal situation for the buyers and
sellers. The following are characteristics of a perfectly competitive market:
There are so many buyers and sellers, and each has a negligible impact on the market
price. Change in the output of a single firm will not perceptibly affect the market price of the
goods. No single buyer can influence the price since he/she purchases only a small amount.
Buyers cannot extract quantity discounts and credit terms.
• A homogeneous product is sold by sellers, which means the products are
highly similar in such a way consumers will have no preference in buying
from one seller over another. The goods offered for sale are all the same or
are perfectly standardized.
• Perfect mobility of resources refers to the easy transfer of resources in
terms of use or in terms of geographical mobility.
• There is perfect knowledge of economic agents of market conditions such
as present and future prices, costs, and economic opportunities.
• Market price and quantity of output are determined exclusively by forces
of demand and supply.
In this market, there are large numbers of buyers and sellers. Sellers offer a
standardized product, a homogeneous good that is not different from the others in
the market. The sellers can easily enter or exit from the market as there are no
barriers to entry and exit from the industry. The buyers and sellers are well
informed about prices and sources of the goods.
Because of the large number of buyers and sellers, no individual
decision-maker can significantly affect the price of the product by changing the
quantity it buys or sells. Thus, the seller is a price taker and must follow the market
price in selling his/her goods.
The standardized product offered by sellers means that the buyers do not perceive
differences between the products of one seller from that of another.
For instance, rock salt will not contain any obvious difference whether one
buys it in Parañaque or in Las Piñas.
Easy entry into and exit from the market means there are no significant
barriers or special costs to discourage new entrants and likewise there are no
barriers that will prevent the sellers from exiting the market.
Well-informed buyers and sellers simply mean that buyers and sellers have all
the relevant information needed to make their decision to buy or sell.
So, is perfect competition realistic? The answer is yes, just like the wheat
market. The model of perfect competition is powerful and many markets, while not
strictly perfect competition, come reasonably close.
IMPERFECT COMPETITION
In other markets, one or more of the assumptions of perfect competition will
not be met. Thus, the market becomes imperfectly competitive.
There are three types of imperfectly competitive markets.

1. Monopoly
Is an industry in which there is only one supplier of a product
for which there are no close substitutes and in which it is very difficult
or impossible for another firm to coexist.
Consumers tend to have a bad image of a monopoly. They fear

that monopolies tend to jack up the price of their goods since
consumers have no choice and cannot buy the good from any other
seller because of the absence of competition, there is also the danger
that consumers will suffer from poor quality of the goods and poor
service delivered by the monopolist.
Monopoly can exist for the following reasons:

● A single seller has control of the entire supply of raw materials.
● Ownership of patent or copyright is invested in a single seller.
● The producer will enjoy economies of scale, which are savings
from a large range of outputs.
● Grant of government franchise to a single firm.
A Monopolist’s quantity of output will be lower to enable him to set
the price higher and because of this, there is a need for stricter government
laws. Additionally, A monopoly can easily exist when there are barriers to
entry that may cause other firms to stay out of the market instead of
entering and competing with firms already there.
The reason could be due to legal barriers to entry are the following:
1. Legal Restrictions
2. Patents
Is a privilege granted to an inventor, whether an individual or a firm,
for a specified time that prohibits anyone else from producing or using that
invention without the permission of the holder of the patent.
3. Control of a scarce resource or input
If a certain commodity can be produced only by using rare inputs, a

company that gains control of the source of those inputs can establish a
monopoly position for itself.
4. Large sunk cost
Entry into an industry will be very risky if it requires a large

investment, especially if that investment is sunk.
5. Technical superiority
A firm whose technological expertise massively exceeds that of any

potential competitor can, for some time, maintain a monopoly position.
Price Discrimination
Is the sale of a given product at different prices to different customers of the
firm when there are no differences in the costs of supplying these customers. Prices
are also discriminatory if it costs more to supply one customer than another, but they
are charged the same price.
Monopolistic Competition
One imperfectly competitive market is a monopolistic competition wherein
products are differentiated, and entry and exit are easy. Additionally, it allows such
a variety of choices, since many firms exist in the market, consumers also have the
freedom to choose from whom to buy from Toyota, Honda Mercedes Benz, or
Volkswagen. If he or she wants a Toyota car, he or she has a variety of choices such
as Wigo, Vios, Altis, Innova, and Fortuner. We can differentiate one car from the
other not only by brand name but also by the model, the style, and the additional
convenience.
Characteristics of Monopolistic Competition
A market is said to operate under conditions of monopolistic
competition if it satisfies four requirements, the first three of which are the
same as those for perfect competition:
1. Numerous participants
Many buyers and sellers, all of whom are small relatives to the
market.
2. Freedom of exit and entry
3. Perfect information
4. Heterogeneous or differentiated product
As far as the buyer is concerned, each seller’s product differs at
least somewhat from every other seller’s product.
Notice that monopolistic competition differs from perfect competition in only
the last respect. Perfect competition assumes that the products of different firms in an
industry are identical, but under monopolistic competition, products differ from seller
to seller. In terms of features, quality, and packaging, supplementary service offers
such as free delivery.
The firm under monopolistic competition faces a downward sloping demand
curve means that it can sell more by changing less and can raise prices without losing
customers. As such, the firms in this market are given room to set different prices on
their product differences. In other words, a firm can set a higher price because it has
something different to offer its buyers.
6. Oligopoly
An oligopoly is a market dominated by a few sellers, at least several of which
are large enough relative to the total market to be able to influence the market price.
Few sellers account for most of or total the production since barriers to free entry
make it difficult for new firms to enter:
Its characteristics are:
● Action of each firm affects other firms; and
● Interdependence among firms.
Oligopoly may exist due to the existence of barriers which may include
economies of scale, reputation of the sellers, and strategic and legal barriers such as
the grant of patents, loyal following of customers, huge capital investments and
specialized inputs, and control of supply of raw materials by a few producers.

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CHAPTER 5

There are three types of imperfectly competitive markets.

Consumers tend to have a bad image of a monopoly. They fear

Monopoly can exist for the following reasons:

If a certain commodity can be produced only by using rare inputs, a

4. Large sunk cost

Entry into an industry will be very risky if it requires a large

A firm whose technological expertise massively exceeds that of any

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