Understanding Different Market Structures
Market Structures
1. Processor Type
The primary function of a market is to connect buyers and sellers, facilitating the exchange of goods and services through the price mechanism.
1.1 Criteria for Classification
Markets can be classified based on several criteria:
- a) Compliance with Market Laws:
- Free Market: Characterized by freedom of transactions.
- Intervened Market: Prices, quantities traded, or both are imposed externally.
- b) Information Availability:
- Transparent Market: Market players are strongly connected and possess comprehensive information.
- Market with Friction: Agents lack complete information, leading to price variations for the same product.
- c) Product Characteristics:
- Perfect Market: Homogeneous merchandise.
- Imperfect Market: Merchandise available in various models with differing characteristics.
- d) Market Power of Participants:
- Normal Market: Neither buyers nor sellers can influence prices due to insignificant trading volume.
- Forced Market: Buyers or sellers can influence prices or transaction quantities.
- e) Number of Participants: (See table below – *Table would need to be added in a real implementation*)
2. Perfect Competition
Perfect competition requires:
- Homogeneous merchandise.
- Fragmentation (many buyers and sellers).
- No single entity with power to influence price.
- Transparency.
- Freedom of entry and exit (no legal or economic barriers).
3. Monopoly
A monopoly exists when there is a lack of competition or a significant limitation thereof. One party has influence over the price, creating a forced market.
3.1 Classes of Monopoly
- Supply Monopoly: Limitation originates from the supply side.
- Demand Monopoly: A single buyer faces many suppliers.
- Bilateral Monopoly: A single supplier and a single buyer.
- Natural Monopoly: One company can produce any level of output more efficiently than multiple competing firms.
4. Oligopoly
An oligopoly is a market with a small number of sellers, each holding a significant market share. A duopoly is an extreme case with only two sellers.
Other terms related to market consolidation:
- a) Trust: Large business concentrations with monopoly power, often resulting from vertical mergers (companies in different phases of production).
- b) Holding: Business concentrations formed when a parent company acquires a majority of shares in other companies.
5. Monopolistic Competition
In monopolistic competition, many companies offer similar, yet differentiated, products. These products satisfy the same need but have unique features.
6. Market Failures
While perfect competition is generally considered the most efficient market organization, it has limitations. It can experience cyclical downturns and lead to uneven income and wealth distribution. Market failures result in the existence of public goods.
7. Market Factors
The price paid for a factor of production depends on market supply and demand.
- It is a derived demand: Increased demand for a good or service leads to increased demand for the factors needed for its production.