CHAPTER 2: THE MARKET STRUCTURES 2.

Unique product
▫ A unique product means that there are no
THE MARKET STRUCTURE close substitutes for the monoposlist
In economics, market is a place where buyers and sellers are
product.
exchanging goods and services with the following
3. Impossible entry
considerations such as:
• Types of goods and services being traded ▫ Barriers to entry are so severe in a
• The number and size of buyers and sellers in the monopoly so that it is impossible for new
market firms to enter the market.
• The degree to which information can flow freely  (1) sole ownership of a vital
resource
Types of Market Structure
 (2) legal barriers like government
1. Perfect Competition
2. Monopoly franchises and licenses
3. Monopolistic Competition  (3) economies of scale
4. Oligopoly
The following are sources of monopoly:
PERFECT MARKET • There is only one producer or seller of goods and
• Is a market situation which consists of a very large only one provider of services in the market.
number of buyers and sellers offering a
• New firms find extreme difficulty in entering the
homogeneous product.
• Perfect competition is built on two critical market, the existing monopolist is considered giant
assumptions: in its field or industry.
▫ The behavior of an individual firm • There are no available substitute goods or services
▫ The nature of the industry in which it so that it is considered unique.
operates. • It controls the total supply of raw materials in the
Characteristics of perfect competition industry and has control over price.
• It owns a patent or copyright.
1. Large number of small firms
• Its operations are under economies of scale.
▫ It is composed of many firms and buyers,
that is, a large number of independently-
Classification of Monopoly
acting firms and buyers, each firm and
• Natural Monopoly – it is a market situation where a
buyer being sufficiently small to be unable
single firm can supply entire market due to the
to influence the price of product transacted
fundamental cost structure of industry.
in the market.
• Legal Monopoly – this is sometimes called as de jure
2. Homogeneous product
monopoly, a form of monopoly which the
▫ the product offered by the competing firms
government grants to a private individual of firm
are identical not only in physical attributes
over the product or services.
but there are also regarded as identical by
• Coercive Monopoly – it is a form of monopoly whose
buyers who have no preference between
existence as the sole producer and distributor of
the products of various producers.
goods and services is by means of coercion (legal or
3. Very easy entry and exist
illegal), so that most of the time it violates the
▫ There are no barriers to entry or
principle of free market just to avoid competition.
impediments to exist of existing sellers.
Imperfect Market
MONOPOLISTIC COMPETITION
• Is a market situation wherein the conditions
necessary for perfect competitions are not satisfied.
• This is a market situation in which there are many
sellers producing highly differentiated products.
MONOPOLY Monopolistic competition is also perfect competition
• Extreme opposite of perfect competition plus product differentiation.
• The consumer has only two choices – either buy the
monopolist’s product or none at all. Characteristics of monopolistic competition
• Comes from the Greek word “monos” means “one” 1. Many small sellers
and “polein” means “sell”. Under this situation, there 2. Differentiated products
is only one seller of goods or services. 3. Easy entry and exit

Characteristics of monopoly Characteristics of monopolistic competition

1. Single seller or producer
2. Unique product 1. Many small sellers
▫ Monopolistically competitive market is
3. Impossible entry
comprised of a large number of
independently-acting firms and buyers.
Characteristics of monopoly 2. Differentiated products
1. Single seller or producer ▫ The product offered by competing firm
▫ A monopoly market is comprised of a single under a monopolistically competitive
supplier selling to a multitude of small market are differentiated from each other
independently-acting buyers. in one or more respects.

1
  Product differentiation – is the 2. Bilateral oligopoly – is a market condition with a
process of creating real or significant degree seller concentration like oligopoly)
apparent differences between and a significant degree of buyer concentration (like
goods and services sold in the oligopsony).
market. 3. Duopsony – is a market situation in which there are
3. Easy entry and exit only two buyers but many sellers.
▫ There are no barriers to entry preventing
new firms entering the market or obstacles 4. Duopoly – is a subset of oligopoly describing a
in the way of existing firms leaving the market situation in which there are only two
market. suppliers.
5. Monopsony – is a form of buyer concentration, that
OLIGOPOLY is, a market situation in which single buyer confronts
many small suppliers.
• The word comes from the word “oligo” means few
sellers and “poly” from monopoly. It is a market
situation in which there is a small number of sellers,
each aware of the action of the others.

Characteristics of Oligopoly

1. Few sellers
▫ Under oligopoly, the bulk of market supply
is in the hands of a relative few large firms
who sell to many small buyers.
▫ Oligopoly is competition ‘among the few’.
2. Homogeneous or differentiated products
▫ In oligopolistic market, the products offered
by suppliers may be identical or, more
commonly, differentiated from each other
in one or more respects.
▫ These differences may be of physical
nature, involving functional features, may
be purely ‘imaginary’ in the sense that
artificial differences are created through
advertising and sales of promotion.
3. Difficult entry
▫ High barriers to entry in an oligopoly
protect firms from new entrants.
▫ These barriers include exclusive financial
requirements, control over essential
resource, patents rights, and other legal
barriers. But the most significant barrier to
entry an oligopoly market is economies of
scale.

Types of Oligopoly

• Pure Oligopoly – those few sellers that produce

identical products. This type of oligopoly is common
in a market situation where the products sold are
fairly homogenous.
• Differentiated Oligopoly – refers to a few sellers to
differentiated products. Value characteristics or
quality of goods varies.

Types of Organization of Oligopoly

• Cartel is a formal agreement among oligopolists to

set-up a monopoly price, allocate output, and share
profit among members.
• Collusion is a formal or an informal agreement
among oligopolists to adopt policies that will restrict
or reduce the level of competition in the market.

Special Types of Market Structure

1. Bilateral monopoly – is a market situation

comprising one seller (like monopoly) and only one
buyer (like monopsony).